Special tax treatment for enterprise asset acquisitions

It is an important exit route for private equity/venture capital (PE/VC) to have its investees access the capital market. An enterprise generally needs to sort out its equity and assets before accessing the capital market. In this case, an inter-enterprise asset acquisition is generally involved.

In the process of enterprise asset acquisitions, reorganization in which special tax treatment is applicable will help smooth asset acquisition, reduce tax costs, and provide solutions to related-party transactions, horizontal competition and other problems that are the focus of IPO review. For these reasons, special tax treatment is worth the attention of PE/VC. Enterprise asset acquisitions mainly involve enterprise income tax, value-added tax and land appreciation tax, in case of acquisition of land and property.

Enterprise income tax can be exempted. It is provided in the Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax Treatment on Enterprise Reorganization that special tax treatment provisions may apply if all of the following substantive conditions are satisfied: (1) the organization has a reasonable commercial purpose and the primary purpose is not to reduce, exempt or defer any tax payments; (2) the assets or equity involved in an acquisition, merger or division should meet the prescribed thresholds as set out in this notice; and (3) the equity consideration involved in the reorganization transaction shall comply with the prescribed ratio as set forth in this notice.

Sean Wang is a partner at Boss & Young