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This article passed the forwarding of "It's a pity that the asset restructuring plan is postponed due to tax"

Note: According to the Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Treatment of Enterprise Income Tax in Enterprise Restructuring Business (CS [2009] No. 59), eligible enterprises can enjoy special tax treatment and no enterprise income tax will be levied.

The reason for the failure was that the terms on special tax restructuring were misunderstood, resulting in the transaction needing to pay high taxes:

1. VAT:

"From the statement in the relevant announcement, this investment is Zoje Technology's contribution to establish a subsidiary with physical assets, which does not include the transfer of creditor's rights, liabilities and labor force. Therefore, it does not meet the provisions of the above documents on not collecting VAT. That is, Zoje Technology needs to pay VAT and its additional taxes on the fixed assets and land use rights invested according to the fair value."

2. Corporate income tax

"However, in this transaction, the amount of investment assets is small, and it is difficult to account for more than 50% of all assets of Zoje Technology, which means that the special tax treatment of asset acquisition cannot be applied to this investment, and it is necessary to recognize the transfer income and calculate and pay corporate income tax based on the fair value of the transferred assets."

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Expert suggestion of Yijiu

Enterprise restructuring generally involves significant transaction assets and tax. If the enterprise restructuring is planned in advance and complies with the provisions of the Notice on Several Issues Concerning the Treatment of Enterprise Income Tax in Enterprise Restructuring Business (CS [2009] No. 59), it can enjoy special tax treatment without enterprise income tax.

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It's a pity that the asset restructuring plan is postponed due to tax

[Selected from Large Enterprise Tax Review]

On June 10, ZOJE Resources ("ST ZOJE" for short) disclosed in the announcement of reply to the inquiry letter of the annual report of Shenzhen Stock Exchange that ZOJE Technology, a subsidiary of the company, intends to set up a subsidiary with physical assets. However, in view of the high taxes for establishing subsidiaries, the reorganization plan was postponed. In practice, it is not uncommon for the restructuring process of ST ZOJE to be blocked due to tax costs. For enterprises with restructuring plans, it is necessary to make tax plans in advance.

Case: The plan to establish a subsidiary is suspended due to tax

In 2020, in order to improve the utilization rate of equipment, ST ZOJE plans to, on the basis of its casting and machining capabilities,

Expand business direction externally and cultivate new profit growth points of the company. Its wholly-owned subsidiary, Zoje Technology, plans to set up a wholly-owned subsidiary on March 31, 2020, with the fixed assets and land use rights related to the casting business valued at 72.5536 million yuan, and Zoje Technology holds 100% of the equity of the subsidiary. According to the data, Zoje Technology had total assets of 1.032 billion yuan and net assets of 172 million yuan at the end of 2019. ST ZOJE announced that during the registration process of ZOJE Technology, after communication with the tax department, the transaction did not meet the special tax treatment conditions specified in the Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Treatment of Enterprise Income Tax in Enterprise Restructuring Business (CS [2009] No. 59). In view of the high tax cost, ZOJE Technology postponed the establishment of the subsidiary.

Analysis: The cost of taxes and fees directly contributed in kind is high

Zoje Technology establishes subsidiaries with fixed assets and land use rights, involving value-added tax and its surcharges, enterprise income tax, land value-added tax and stamp tax, and its subsidiaries involve deed tax and stamp tax.

In terms of VAT, according to the Announcement of the State Administration of Taxation on VAT Issues Related to Taxpayers' Asset Restructuring (Announcement No. 13 of the State Administration of Taxation in 2011) and the Provisions on the Pilot Issues of Levying Value Added Tax in Lieu of Business Tax, during the process of asset restructuring, taxpayers will, through merger, division, sale, replacement and other methods Liabilities and labor are transferred to other units and individuals at the same time, which is not within the scope of VAT. The transfer of goods, real estate and land use right involved in the transfer shall not be subject to VAT.

From the statement of the relevant announcement, this investment is Zoje Technology's contribution to establish a subsidiary with physical assets, and does not include the transfer of creditor's rights, liabilities and labor force. Therefore, it does not meet the provisions of the above documents on the non collection of value-added tax. That is to say, ZOJE Technology needs to pay value-added tax and its surcharges on the fixed assets and land use rights invested according to the fair value.

In terms of corporate income tax, CS [2009] No. 59 stipulates that for asset acquisition, if the assets acquired by the transferee enterprise are not less than 50% of the total assets of the transferred enterprise, and the amount of equity payment of the transferee enterprise when the asset acquisition occurs is not less than 85% of the total transaction payment, special tax treatment can be selected. However, in this transaction, the amount of investment assets is small, and it is difficult to account for more than 50% of all assets of Zoje Technology, which means that this investment cannot be applied to the special tax treatment of asset acquisition, and it needs to recognize the transfer income and calculate and pay enterprise income tax based on the fair value of the transferred assets.

In terms of land value added tax, Article 4 of the Announcement of the Ministry of Finance and the State Administration of Taxation on Continuing to Implement the Land Value added Tax Policies Related to the Restructuring and Reorganization of Enterprises (Announcement No. 21, 2021 of the Ministry of Finance and the State Administration of Taxation) stipulates that units and individuals invest in real estate at the price of shares during the restructuring and reorganization, and land value added tax will not be levied temporarily for the enterprises that transfer and change the real estate to the invested enterprises. If the local tax authority recognizes that the policy applies to direct investment, ZOJE Technology can enjoy the privilege of not collecting land value added tax for the time being.

In terms of stamp duty, for the transfer of ownership of real estate and land use rights in this transaction, Zoje Technology and its newly established subsidiaries shall calculate and pay stamp duty according to the "Certificate of Property Right Transfer".

In terms of deed tax, the Announcement of the Ministry of Finance and the State Administration of Taxation on Continuing to Implement the Deed Tax Policies Related to the Restructuring and Restructuring of Enterprises and Public Institutions (Announcement No. 17, 2021, of the Ministry of Finance and the State Administration of Taxation, hereinafter referred to as "Announcement No. 17") stipulates that the parent company increases its capital to its wholly-owned subsidiaries with the ownership of land and housing, which is deemed to be transferred and exempted from deed tax. In this transaction, ZOJE Technology set up a new subsidiary with physical assets, which is not a capital increase for the subsidiary, so the proposed subsidiary cannot be exempted from deed tax.

From the above analysis, it can be seen that if Zoje Technology chooses to directly invest in new subsidiaries with physical assets, Zoje Technology and its subsidiaries will not be able to enjoy the corporate income tax and deed tax incentives on restructuring, and the cost of taxes and fees will be high.

Suggestion: set up subsidiaries first and then increase capital

In fact, in the above transactions, the relevant parties can optimize the asset restructuring plan to enjoy the corporate income tax and deed tax restructuring policy, reduce the tax cost in the restructuring, and then achieve the goal of asset restructuring.

Specifically, Zoje Technology can invest a small amount of capital to set up a wholly-owned subsidiary, and then increase the capital of the subsidiary with fixed assets and land use rights. There is no minimum limit on the registered capital for the establishment of subsidiaries in the current laws and regulations, and the enterprise can make its own choice according to the actual situation and subsequent business planning. Under this scheme, the treatment of value-added tax, land value-added tax and stamp tax has not changed compared with the original scheme, but the corporate income tax and deed tax can enjoy relevant restructuring incentive policies.

In terms of corporate income tax, according to the Notice of the Ministry of Finance and the State Administration of Taxation on the Treatment of Corporate Income Tax Related to Promoting Enterprise Restructuring (CS [2014] No. 109), ZOJE Science and Technology increases its capital to its subsidiaries with physical assets, which can be applied to the special tax treatment of asset transfer. That is, Zoje Technology and its subsidiaries do not recognize income for the time being. The subsidiaries accept the tax base of assets and determine it based on the original tax base of Zoje Technology. The transferred assets acquired by the subsidiaries are depreciated at their original book value and deducted before corporate income tax.

In addition, ZOJE Technology can also choose to apply the deferred tax policy of non monetary asset investment. According to the Notice of the Ministry of Finance and the State Administration of Taxation on the Issues of Enterprise Income Tax Policies for Investment in Non monetary Assets (CS [2014] No. 116), income from the transfer of non monetary assets recognized by resident enterprises through external investment in non monetary assets can be evenly included in the taxable income of the corresponding year by stages within a period of no more than 5 years, and the enterprise income tax can be calculated and paid according to the provisions. That is to say, the income from the transfer of fixed assets and land use rights of Zoje Technology in this transaction can be recognized by stages within five years. Which policy is more appropriate can be measured in combination with relevant data.

In terms of deed tax, ZOJE Science and Technology increased the capital of its subsidiaries in consideration of physical assets, meeting the conditions specified in Announcement 17, and the subsidiaries can enjoy the tax preference of exemption from deed tax.

In asset restructuring, enterprises should understand all policy documents, make good use of current tax policies that encourage mergers and acquisitions, maximize tax benefits, and consider the impact of various taxes as a whole. In addition, relevant enterprises should fully communicate with the competent tax authorities to prevent potential tax related risks. (Author's unit: Lanzhou Taxation Bureau of the State Administration of Taxation)