Extension of deed tax policy support for enterprises
As mentioned earlier, deed taxes are also applied to the restructuring or reorganization of both local and foreign enterprises in China. Whereas the transfer of land use rights and real properties may occur for different types of company restructuring or reorganization.
On April 26, 2021, the Ministry of Finance (MOF) and STA extended the DT exemption for different types of reorganization up to three years since its effectivity. Thus, enterprises undertaking reorganizations involving the transfer of land use rights or real properties will have been benefiting from the policy support from January 1, 2021, to December 31, 2023.
Types of deed tax-exempt reorganizations
As per Announcement No. 17 (2021), the following types of reorganizations will be exempt from DT considering that they are eligible under certain conditions:
While the rights and obligations will be inherited by the transferee (post-restructuring enterprise), original investors (pre-restructuring enterprise) remain unchanged. That is, they retain more than 75 percent of equities after the restructuring. However, the retainable ratio of equities may vary accordingly.
Merger & Split
Post-merger or post-split companies are exempt from DT provided that the original investors are retained after the merger or split.
The deed tax exemption for bankruptcy depends on whether the transferee is a creditor or a non-creditor.
If the transfer is made to creditors including all employees (payment for debt), DT will be exempt. On the other hand, there are two conditions when the transfer is made to a non-creditor.
- DT exempt – if the non-creditor assumes the employment contracts of all employees of the transferor (bankrupt enterprise) for three years or more.
- 50% deduction – if the non-creditor assumes the employment contracts with more than 30 percent of employees of the transferor (bankrupt enterprise) for three years or more.
For the transfer of assets, enterprises can enjoy deed tax exemption if the transferor is the same investor. That is, the transfer occurs between enterprises held by the same investor.
Different transfers by the same investors
- Parent company and its wholly-owned subsidiaries
- Between two subsidiaries wholly-owned by a company
- Between a natural person and his/her sole proprietorship or one-person limited liability company
Moreover, transfer from a parent company to its wholly-owned subsidiaries for capital increase purposes is exempt from deed tax as well.
A debt-to-equity swap is one way for a struggling enterprise to continue to operate. Thus, it is a refinancing deal in which a creditor turns the debt into shares whereas the struggling company’s debt is canceled or repaid.
A debt-to-equity swap is exempt from DT given approval from the State Council.
Acquisition by the government
If the transfer involves government acquisition from a pre-restructuring enterprise by means of transfers or investment by the State, deed tax exemption will apply.
Transfer of shares
Where shares transfer occurs, the enterprise will also be exempt from DT given that ownership of the land use rights and real properties is the same or unchanged.