Chinese court rules offshore merger by absorption does not qualify for special reorganization relief
Tax Analysis:August 2016/China
A Chinese court located in Zhifu District, Yantai City in Shandong Province issued a decision in December 2015, in which it concluded that the merger of two Italian companies by an upstream absorption (that resulted in a change of the shareholders of a Chinese company) does not qualify for special reorganization treatment in China and, hence, the tax authorities' decision to tax the deemed capital gains derived from the share transfer is justified. (Tax Analysis:August 2016/China)
Under China’s merger and acquisition tax rules (as set out in Circular 59), a reorganization can be considered either an ordinary reorganization or a special reorganization. An ordinary reorganization is taxed under the normal enterprise income tax rules governing the transfer of assets, with any taxable gain or loss recognized at the time of the transaction. By contrast, a special reorganization is a tax-free transaction under which recognition for tax purposes of the gain or loss on the transfer of shares or assets is deferred, provided certain conditions are satisfied. Special rules apply to cross-border reorganizations.
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