The persistent gap

Enterprise reorganisations are central to the growth of business activities. As soon as an enterprise is formed, it could become engaged in reorganisation for various legitimate reasons. Nevertheless, multiple factors would affect whether and how to structure enterprise reorganisations. Among them, tax remains a key consideration. Enterprise reorganisations will generally be subject to tax unless they are specifically exempt. Taxable enterprise reorganisations could potentially lead to exceedingly high tax bills and force business executives to think twice before making a move. Obviously, there should be a balance on tax and economic considerations with respect to enterprise reorganisations. To encourage enterprise reorganisations, the leading economies generally lay out the mandatory conditions for tax-free treatment. To be more precise, it does not really mean a tax-free escape, but a tax deferral until a future recognition event.

China has been very slow in playing a catch-up in this area. On April 30 2009, the Ministry of Finance (Mof) and the State Administration of Taxation (SAT) jointly issued Caishui [2009] No. 59 (Circular 59) to set out the guidelines on the income tax treatment of enterprise reorganisations. Hailed as a step forward, Circular 59 has proved to have limited practical value for many reasons since its adoption. One reason is that Circular 59 lacks specifics with respect to the key terms and the implementation requirements. Both taxpayers and tax officers are struggling with difficulties in properly applying Circular 59. It has long been expected that the SAT would come up with further clarifications just to make it work.