China: New regulations to encourage corporate restructuring and investment with non-monetary assets

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2026

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement


China: New regulations to encourage corporate restructuring and investment with non-monetary assets

ho.jpg

lu.jpg

Khoonming Ho


Lewis Lu

The State Council issued a circular – 'Guidelines on further optimising market environment for M&A restructuring' – which requires finance and tax authorities to "amend the regulations governing special tax treatment for M&A restructuring activities". As a response, in December 2014, the Ministry of Finance and the State Administration of Taxation jointly issued Circular 109 (Caishui [2014] No.109) and Circular 116 (Caishui [2014] No.116) respectively to provide further clarity on the special restructuring under Circular 59 (Caishui [2009] No.59) as well as investment with non-monetary assets. Circular 109 relaxes the 'ratio limits' in relation to share or asset acquisition to enjoy special restructuring under Circular 59. For a share (asset) acquisition, the shares (assets) acquired should be at least 75% of the total shares (assets) of the acquiree entity under Circular 59, while the minimum ratio limit is reduced to 50% under Circular 109.

Circular 109 also adds the following two additional situations which can qualify for special restructuring:

  • The PRC transferor and the PRC transferee have a 100% direct-investment holding relationship; or

  • The PRC transferor and the PRC transferee are 100% directly owned by the same PRC shareholder or the same group of PRC shareholders

The CIT treatment for investment with non-monetary assets under Circular 91 (Caishui [2013] No. 91), which was adopted for entities in Shanghai's pilot free trade zone, has been expanded to the rest of China due to the release of Circular 116.

Table 1

Entity

Tax treatment

Investor

Tax treatment for the gains derived from investment with non-monetary assets Investment gains = fair market value (FMV) of the invested assets – tax basis of the assets

(Investment gains can be realised equally for no more than five years for CIT purposes.

The investment gains will be realised when the investment agreement becomes effective and relevant registrations have proceeded.)

Tax treatment for the shares of the investee obtained

Tax basis of the shares obtained = the original tax basis of the invested assets + investment gain realised each year

(The tax basis should be adjusted each year in line with the investment gain realised.)

Investee

Tax basis of the non-monetary assets obtained = FMV

If the investor later transfers the shares obtained or retracts those investments or is liquidated, the above tax deferral treatment is terminated and all the gains are immediately subject to CIT.

Circular 106 also adds that investment with non-monetary assets includes situations when a new PRC resident enterprise is established with non-monetary assets or an existing PRC resident enterprise is injected with such assets. When the entity conducts investment with non-monetary assets and it also qualifies for special restructuring under Circular 59, the entity can elect such special tax treatment stipulated in Circular 59.

Both Circular 109 and Circular 116 took effect January 1 2014 and are valid for cases unresolved before the issuance date of the circulars.

Khoonming Ho (khoonming.ho@kpmg.com)

KPMG, China and Hong Kong SAR

Tel: +86 (10) 8508 7082

Lewis Lu (lewis.lu@kpmg.com)

KPMG, Central China

Tel: +86 (21) 2212 3421

more across site & shared bottom lb ros

More from across our site

The recently formed firm has taken a break from hiring EY talent to expand its transactional tax and tax technology capabilities
The AI platform, founded last year by two school friends, is partnering with challenger firms like Unity Advisory and A&M Tax to launch its own assault on the AI tax market
Not only has Aurtus received recognition from ITR in the past, but its founder was both a partner at KPMG and co-founder of Dhruva Advisors
Clients care more about considered counsel than rapid media-friendly soundbites, says Matthew Gilleard, associate director at Infinite
It was also a memorable night for Galicia, KPMG, Skadden and Pinheiro Neto, all of which scooped major awards at a gala ceremony in New York
The former Deloitte UK CEO earned a 45% raise in a year when 1,000 staff reportedly lost their jobs – and the pay gap is only getting bigger
In a seminal development for big law, the 95-year-old firm is set to cease operations after a series of high-profile partner departures
UK Chancellor John Healey extended a VAT cut, suspended tariffs, increased a bank surcharge and vowed to increase funding for HMRC
Kristine Riisberg warned that TP decisions can determine top-up tax exposure under pillar two, while global consensus over the rules remains unsettled
Both Germany’s NIS2 and the EU AI Act now determine whether a tax function can meet its obligations – and both can make management personally accountable
Gift this article