Tax on Inbound Investment 2014

1 Tax treatment of different acquisitions

What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?

PRC tax law distinguishes between acquisition of shares and acquisition of business assets and liabilities. Under both scenarios, as a general rule, gains shall be recognised and taxed upon acquisition. Generally speaking, for the seller, a share deal is often more tax efficient than an asset deal.

In the case of acquisition of shares in a company, the corporate income tax (CIT) issues of the target company will remain intact. The capital gains or losses realised by the share transferor shall be calculated based on the difference between the fair market value of the shares and the original investment costs. If the share transferor is an individual tax resident, 20 per cent individual income tax (IIT) on the gains (if any) shall be paid by the share transferor. If the share transferor is a Chinese tax-resident enterprise (TRE), the gains or losses shall be included into its overall taxable income subject to 25 per cent CIT. If the share transferor is a non-PRC-resident enterprise (non-TRE), 10 per cent withholding tax on the gains (if any) shall be paid in China. If the share transferor is a foreign individual or entity, PRC income tax may be waived if the applicable double taxation treaty stipulates that China does not have the taxation right over the gains.

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