Tax Treatment of Mergers, Divisions and Reorganizations

By Ding Fa “David” LIU
Jun He Law Offices

With the new Enterprise Income Tax Law (企业所得税法)(new EIT law) taking effect on January 1 2008, the tax treatment of mergers, divisions and reorganizations of foreign investment enterprises (FIEs) are now in limbo. Technically, with the repeal of the Foreign Investment Enterprise and Foreign Enterprise Income Tax Law (old EIT law), all circulars issued under the old EIT law would automatically cease to be effective. However, based on past experience, the PRC tax authorities tend to follow the old circulars even though the old circulars would technically cease to be effective with implementation of the new tax law.

This article analyzes the tax treatment of mergers, divisions and reorganizations of FIEs under Circular [1997] No. 71 and Circular [1997] No. 207 (Old Circulars) which were issued under the old EIT law. It also looks at the uncertainty of the tax treatment of mergers, divisions and reorganizations of FIEs under the new EIT law.

Tax Treatment of Mergers and Divisions under Old Circulars Tax Treatment at the Company level Pursuant to Circular 71, the assets, liabilities and owner's equity after a merger or a division should be recorded at their historical cost in the hands of premerger/ division enterprise. Irrespective of the accounting treatment, the assets, liabilities and owner's equity shall, for tax purposes, be recorded at the historical cost in the book of accounts of the postmerger/ division companies.