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SAT Cancels Approval of Preferential Policies

To implement the requirements of the State Council to transform functions, streamline administration, delegate power, and combine regulation with deregulation, the State Administration of Taxation (SAT) recently released the Announcement on Administration of Corporate IncomeTax Involved in Company Reorganization, clarifying that special tax treatment will be applicable to company reorganization after the cancellation of verification of businesses of enterprises eligible for special tax treatment,with prior verification replaced by declaration management, and standardizing and revising subsequent management items and optimizing administration processes to further support company mergers and reorganization and optimize the environment for the development of enterprises.

According to a responsible person of the SAT Income Tax Department, to promote company mergers and reorganization, the Ministry of Finance and the State Administration of Taxation (SAT) released in2009 the Circular on Treatment of Corporate Income Tax Involved in Company Reorganization, allowing qualified enterprises that conduct reorganization to pay corporate income tax in a deferred manner. In 2010, the SAT released Management Measures for Corporate Income Tax Involved in Company Reorganization,offering process guidance for companies to enjoy special treatment. But as perthe provisions, a company that chooses applicable special tax treatment should file in writing with its competent tax authority when filing an annual tax return, otherwise, the company will be disqualified for special tax treatment.However, as the State Council's administrative approval system proceeds, prior verification will become increasingly inapplicable to company reorganization.In May, the State Council released the Decision on Cancelling Non-administrative Approval Items, canceling the verification of businesses ofenterprises eligible for special tax treatment. The SAT released thisannouncement to change the way of management of special tax treatment for company reorganization in a timely manner.

The Announcement specifies that prior verification for the special tax treatment for company reorganization shall be replaced by declaration and submission of relevant materials in the annual final settlement. A company that conducts reorganization after mergers and spinoffs that involve write-offs shall make a declaration before going through the tax write-off registration procedures. The Announcement adds there quirement on management of step transactions in 12 consecutive months before reorganization, that is, the company shall state whether there are other transactions on equity and assets within 12 consecutive months before there organization, whether these are step transactions associated with there organization and whether the transactions are conducted as a reorganization business when the company makes an annual declaration.

Given deferred treatment of gains from asset transfers and the adjustment of tax basis of assets, ledger and expert team management should be adopted for special tax treatment for company reorganization to improve subsequent management. The Announcement defines the obligations and responsibilities of tax officials and taxpayers and builds asound subsequent management system for special tax treatment for companyreorganization.

According to the Announcement, the parties involved in reorganization should accurately record and state the deferred payment of taxes on the gains, and submit a special statement when transferring or disposing of reorganized assets (equity), which should focus on the comparison of tax basis of reorganized assets (equity) determined for specialtax treatment with that of assets transferred or disposed of, and the treatment of deferred tax liabilities. Tax authorities should track and monitor theaffairs to understand the dynamic changes to relevant assets and equities within 12 months before and after company reorganization. A ledger should be established, and comparison management in the transfers of reorganized assets(equities) should be enhanced and relevant statistics collection and reportingshould be conducted properly to facilitate effect analysis and policy improvement.

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