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Q: How about the tax holidays of the pre-merger company?

    According to the Notice of Ministry of Finance and the State Administration of Taxation on Enterprise Income Tax Treatment of Enterprise Reorganisation Caishui [2009] No.59, in the case of a merger by absorption, where the eligibility and conditions of tax incentive entitlement of the surviving corporation have not changed; such an entity’s pre-merger unused tax incentive may be carried over after the merger is completed. The amount of the tax incentive is determined based on the taxable income (zero if taxable loss) of the surviving entity in the year preceding the merger.

Related FAQs From the topic Mergers and Acquisitions

  • 1.Is Foreign Direct Investment (FDI) on the increase in China?


    FDI rose from 2009 to 2013 except for in the year 2012. The data is as below:

    Unit: Billion USD

    Year: 2014, 2013, 2012, 2011, 2010, 2009

    Amount 117,59 111.72 116.01 105,74 90.03

     

    Regarding 2014, figures show that from January to September this year total FDI stood at 87.36 billion USD, this compares to an equivalent figure of 88.60 for 2013.

     

    The data above is sourced from http://www.mofcom.gov.cn/article/tongjiziliao/v/?3

  • 2.Aren’t FDIs fraught with onerous legal requirements?


    Much less so in recent years. China launched a series of reforms that made the framework for foreign investment more flexible and much clearer.

  • 3.What part does M&A play in modern China?


    With the continuous development of economic globalisation and increasingly severe market competition, more and more companies are looking at M&A as a vehicle to adjust their economic strategic structure, increase their cash flow, expand their production scale, improve their economic efficiency and promote their cultural integration and their management ideals.

  • 4.Is a foreign invested enterprise (FIE) treated any differently than a domestic company?


    Yes. FIEs are controlled through the Catalogue for the Guidance of Foreign Investment Industries revised in 2011, which classifies various industries into: (1) the encouraged, (2) the permitted, (3) the restricted and (4) the prohibited.

  • 5.What is the main difference between a WFOE and a CJV?


    A CJV is a more flexible corporate form, in which risks and profits can be allocated by agreement. Since 1995, FICLS has been an alternative for foreign investors.

  • 6.What is a FICLS?


    A Foreign Invested Company Limited by Shares is one of four possible forms that a foreign investor may opt for as a corporate structure. A FIE may be converted into a FICLS.

  • 7.Is it possible to invest in China outside of these corporate structures?


    No. It is a legal requirement that all investments are made through one of the four corporate structures, and approved by the Ministry of Commerce (MOFCOM).

  • 8.Would a merger or an acquisition (M&A) with an existing FIE avoid MOFCOM scrutiny?


    No. Any change to a FIE must obtain MOFCOM approval in advance. Thus, any M&A involving foreign investment falls squarely under control of MOFCOM.

     

    In recent years, the rules on M&A concerning FIEs have been revamped and provided a much clearer picture for M&A transactions. According to Article 31 in Anti-monopoly Law, which has  been in effect since January 1st, 2008, if a foreign investor participates in the concentration of undertakings by merging and acquiring a domestic enterprise or by any other means, which involves national security, the matter shall be subject to a review on national security as is required by the relevant state regulations, in addition to the review on the concentration of undertakings in accordance with the provisions of this law.

  • 9.What are the merger and acquisition options for a foreign company hoping to enter the Chinese market?


    M&A is a major component of the new wave of foreign investments recently flowing into China. There are two essential choices for foreign companies interested in investing in M&A with domestic companies: direct and indirect M&A.

     

    The indirect method is self-explanatory, and occurs when a foreign investor invests in another company outside of China, using that company to own parts of a Chinese firm. Most deals are done in an indirect M&A method; however, this method has many disadvantages. While indirect investment may be suitable for foreign companies who have already had a considerable presence in the Chinese market, it may be inapplicable for companies who have not entered the market yet, and want to maintain a market share for only a short period of time.

     

    A foreign company owned by foreign investors could purchase the equity of shareholders of non-foreign investment enterprises in China or subscribe to additional capital of domestic companies to convert such domestic companies into foreign investment enterprises. This process is called equity acquisition. Another method is that a foreign company could purchase the assets of domestic companies by foreign investors through an agreement and invest such assets to provide foreign enterprises for operation of such assets, which is defined as assets acquisition. These two methods are direct M&A, which are able to enter the market in a short period of time. Currently, there are extremely strict laws and rules for its permit in China.

  • 10.What are the legal documents that support M&A through Foreign Invested Enterprises (FIEs)?


    There are eight major supporting legal documents for M&A through FIEs:

     

    1. Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors (2009)

     

    2. Anti-monopoly Law (2008)

     

    3. Measures for Strategic Investment by Foreign Investors upon Listed Companies (2005)

     

    4. Using Foreign Investment to Reorganise State-owned Enterprises Tentative Provisions (2003)

     

    5. Issues Relevant to the Transfer of State-owned Shares and Legal Person Shares in Listed Companies to Foreign Investors Circular (2002)

     

    6. Interim Rules on the Domestic Investment by FIEs (2000)

     

    7. Rules on Merger and Division of FIEs (1999)

     

    8. Regulations on Changing Investor’s Shares Right in the FIEs (1997)

  • 11.Who can apply for FIEs under these regulations?


    EJVs, CJVs, WFOEs in the form of a limited liability company and foreign invested companies limited by shares can all apply under the regulations. The investments which the above mentioned companies can apply for, can include establishing new companies or acquisition of other companies.

  • 12.When can a FIE begin to invest onshore and what limits these investments?


    Now there are no specific regulations for this.

  • 13.What are some of the problems involved with M&A with State Owned Enterprises (SOEs)?


    First of all, M&A with SOEs require approval from many government agencies such as the State Authority of Property Management. Secondly, the procedure is not very transparent. There will be uncertainty when approaching this method because there are unclear approval procedures. The approval authorities employ a significant amount of discretion regarding this matter.

  • 14.What are the chances of M&A with listed companies on the China stock market?


    M&A with listed companies on the China stock market are legally allowed. However, there are still many specific restrictions.

  • 15.What are the several ways in which mergers & acquisitions in the Chinese Market can take place?


    Mergers & acquisitions deals may take the form of either;

     

    (i) The purchase of equity or assets of an existing company.

     

    (ii) Share swaps

     

    (iii) A merger of two or more business entities by way of cash or shares, or

     

    (iv) A combination of (i), (ii) and (iii).

  • 16.Given that mergers and acquisitions in China can take several forms, how should one structure one’s business in the Chinese market?


    This would depend on many factors. For example, if a foreign investor already has a reliable business associate in China, the foreign investor may wish to consider entering into a merger with the existing entity. The advantages of a merger with a local counterpart are, among others, ready local knowledge and channels to penetrate the local market and the comfort of having one less competitor in the market while the existing business continues.

    In some instances, the foreign investor may worry about the hidden liabilities in the target company. Under these circumstances, the foreign investor may be reluctant to enter into a merger with the target company but wish to purchase only the assets of the target company. Therefore, the foreign investor may form a separate entity and thereafter acquire the assets of the local company through the newly formed entity. An asset deal enables the foreign investor to acquire only the viable assets without having to take over the accumulated debts and liabilities of the local entity.

  • 17.Does China have an anti-trust law which a foreign investor has to consider when entering into a merger and acquisition deal?


    China issued an Anti-monopoly Law which took effect from January 1, 2008. According to Anti-monopoly Law, Article 31, if a foreign investor participates in the concentration of undertakings by merging and acquiring a domestic enterprise or by any other means, which involves national security, the matter shall be subject to a review on national security as is required by the relevant state regulations, in addition to the review on the concentration of undertakings in accordance with the provisions of this law.

  • 18.Is it necessary to conduct a legal due-diligence exercise in a merger and acquisition transaction in China?


    Certainly. Some Chinese companies may have certain irregularities somewhere in the course of their business. For example, the director of a company may deliberately fail to file for registration of title to a property in order to save costs. It is imperative that a foreign investor resolves any irregularities there may be before entering into the merger and acquisition transaction. Therefore, conducting a legal due diligence exercise is often just as important as conducting a financial due diligence to determine the viability of the target company in a merger and acquisition deal.

  • 19.What is the general tax consequence of a merger in China?


    According to the Notice of the Ministry of Finance and the State Administration of Taxation on Enterprise Income Tax Treatment of Enterprise Reorganisation Caishui [2009] No.59, as a general proposition, the relevant tax treatments of merger are as follows:

     

    1) The merging enterprise shall determine the tax basis of assets and liabilities received from the merged enterprise(s) in accordance with the fair market value.

     

    2) The merged enterprise and its shareholders shall follow the enterprise income tax treatment of liquidation.

     

    3) The tax losses of the merged enterprise shall not be carried over to or be utilised by the merging enterprise.

  • 20.What are the tax benefits of a merger?


    If a merger meets some special conditions, the recognition of gain or loss could be deferred. Compared with an asset acquisition, a merger will not trigger any VAT or business tax issues.

  • 21.Are there any special requirements on the tax accounting of the post merger company?


    Under current rules, the assets, liabilities and shareholders’ equity should be recorded at fair market value. The depreciation or amortisation value should also be calculated based on the fair market value of the corresponding assets.

  • 22.What is the tax effect of the losses of any pre-merger company?


    According to the Notice of the Ministry of Finance and the State Administration of Taxation on Enterprise Income Tax Treatment of Enterprise Reorganisation Caishui [2009] No.59, the tax losses of the merged enterprise do not need to be carried over to or be utilised by the merging enterprise. However, if some special conditions are satisfied, the net operating losses of the merged enterprise, which may be utilised by the merging enterprise, equals the fair market value of the net assets of the merged enterprise times the bond yield of the government bond with the longest maturity term as at the year end to which the merger occurred.

  • 23.If a foreign investment enterprise (FIE) has several branches in different localities, how would they pay tax?


    Generally, income tax should be consolidated and paid by the company’s HQ. As for VAT and business taxes, the branches should pay those taxes in their own localities. However, with the approval of the competent tax authorities, HQ may consolidate VAT for all branches in China.

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