Tax Fax: The tax mystery behind a cross-border restructuring business

The tax mystery behind a cross-border restructuring business

Author: Reporter Wang Shanhong

The cross-border business restructuring of Group M, a non-resident enterprise, involving a resident enterprise in mainland China – has attracted the attention of tax officials. To what extent is this cross-border restructuring progressing? Does it involve a direct transfer of equity in a mainland resident enterprise? After verification, the tax officer found that the restructuring business was very complex......

Recently, the Beijing Chaoyang District Taxation Bureau of the State Administration of Taxation conducted an investigation into the cross-border restructuring business of the non-resident enterprise M Group, and confirmed that the enterprise splitting link in the cross-border restructuring business was in essence that the non-resident enterprise directly transferred the equity of the mainland resident enterprise, and should declare and pay the enterprise income tax of RMB 230 million to the mainland tax authorities in accordance with the mainland tax laws and regulations. After several interviews with Group M, the company finally accepted the opinion of the mainland tax authorities and paid the tax in full.

A news report that attracted attention

One morning in January 2023, a tax officer from the international tax department of the Chaoyang District Taxation Bureau was browsing the news on her way to work, when a financial news report caught her attention - "Country G N Group announced that it would acquire the S product business of Country X M Group".

In the tax officer's impression, the core enterprise of Group M engaged in the S product business was Company F, a mainland resident enterprise, whose registered place of operation was in Chaoyang District, Beijing.

Subsequently, the tax officers of the international tax department of the Chaoyang District Taxation Bureau carefully studied this news and other relevant reports. According to news reports, the acquisition of the S products business will be carried out in the form of a new joint venture. The new joint venture will be dedicated to the operation of S products, with Group N contributing US$5.2 billion to acquire a 75.5% stake in the joint venture, with Group M holding the remaining 24.5%.

To what extent is this cross-border restructuring activity progressing? Is it done? Does it involve a direct transfer of equity in a mainland resident enterprise?

The tax officer got in touch with the financial officer of Company F, a subsidiary of Group M, and learned that the cross-border restructuring business claimed in the news did exist, and it was currently in progress and had not yet been completed. According to the financial officer of Company F, the financial management of Group M is rigorous, and if necessary, the company will report relevant information to the mainland tax authorities after the completion of the restructuring.

However, for most of the following six months, Group M did not submit any materials and information to the mainland tax authorities in connection with this cross-border restructuring business.

In September 2023, the tax-related business representative of Country X M Group submitted the relevant information of this cross-border restructuring business to the Chaoyang District Taxation Bureau. At this time, the shareholder of Company F in China has been changed from Company C in Group M to Company D, which is also part of Group M.

In the materials submitted, Group M proposed that although the equity holder of Company F had changed, it was not a general equity transfer, but an asset restructuring of an enterprise with a reasonable commercial purpose and in line with the conditions for the continuation of shareholders' rights and interests, so the "general tax treatment" method of recognizing the income from the equity transfer and paying taxes on the income after the equity change of ownership was not applicable. This business is subject to a special tax treatment - deferred tax treatment. That is, in the subsequent course of operation, if the operating interests of Company F change and no longer belong to Group M, Group M will then declare and pay taxes to the Chinese tax authorities on the relevant income.

The tax officers were a little surprised to see that Group M proposed that the restructuring business be subject to special tax treatment. Because from the previous relevant news reports and communication with the personnel of Company F, the core feature of the corporate restructuring business carried out by Group M involving Company F is that Company F's S product business was acquired by Group N. Why did Group M put forward the request for special tax treatment such as deferred tax payment?

In order to ensure that the relevant tax is not lost, the International Tax Department of the Chaoyang District Taxation Bureau decided to conduct an in-depth verification and analysis of the filing materials submitted by M Group for the cross-border restructuring business, as well as the specific circumstances of the restructuring business.

Complex cross-border restructuring of the business

After careful analysis of the filing materials submitted by the enterprise, the tax officers found that the cross-border restructuring business of Group M not only had a complex shareholding structure and involved enterprises from other countries, but also had the characteristics of many restructuring steps and large amounts of money, which was far more complicated than the situation disclosed in the news report.

The first step is to spin off Company C, a subsidiary of Group M, to establish a new company, Company D, and transfer Company F, a mainland resident enterprise engaged in S product business held by Company C, to Company D, so as to achieve the goal of divesting the S product business from Company C to Company D. In the second step, Company B, the parent company of Company C (Group M), injects its equity in Company D into Company E (Group M), a wholly-owned subsidiary of Company B. In the third step, Group N of Country G acquires 75.5% of the equity of Company E in the form of cash payment, and Company B of Group M continues to hold 24.5% of the equity of Company E.

It turned out that the relevant situation mentioned in the news report was only the last link in the many links of this huge cross-border restructuring business!

With regard to this cross-border restructuring business, Group M believes that although the business is carried out in three steps, it should be regarded as an activity of its global business restructuring and is an inseparable whole from a commercial point of view. The first and second steps are actually the preparation for the third step.

Group M argued that it did not receive any form of income in either Step 1 or Step 2 and did not receive cash income from Group N until Step 3. The third step is the transfer of the equity of Company E from Group M to Group N, although Company E holds the equity of Company F, a resident enterprise in mainland China, Company E has business substance, and its equity value and asset value are not mainly derived from China, and the transaction has a reasonable commercial purpose. According to the Announcement No. 7 of 2015 of the State Administration of Taxation, this act is an indirect transfer of the equity of Company F, and although Group M actually obtains income, this part of the income does not come from within China, and it is not required to declare and pay enterprise income tax in China. Therefore, Group M hopes that the Chinese tax authorities will treat the multiple aspects of the cross-border restructuring business as a whole in accordance with the principle of substance over form, and apply special tax treatment in accordance with the provisions of laws and regulations.

Clarify the facts and recover the tax

Is there any special tax treatment for this cross-border restructuring business?

After carefully reviewing the filing materials submitted by Group M, the tax personnel conducted a detailed verification and analysis of whether the business had a reasonable commercial purpose, the timing of the three steps of cross-border restructuring and the content of the agreement, and whether the amount of equity payment involved in the restructuring transaction met the prescribed proportion, and made important discoveries in the process.

They found that the three steps of this seemingly complex cross-border restructuring business took place not long ago, and the actual time from the first step to the completion of the last step was just over 20 days. The tax officer believes that from the details, this transaction involves 1 direct transfer and 2 indirect transfers, and the transferor, transferee and direct transferee are different in the three steps, and should be regarded as three independent transactions.

Article 5 of the regulations clarifies five basic conditions for the application of special tax treatment to enterprise income tax for enterprise restructuring business, of which item 5 stipulates that "the original major shareholder who obtains equity payment in enterprise restructuring shall not transfer the equity obtained within 12 consecutive months after the reorganization." ”

The tax officer found that in the first step of the reorganization, Company B of Country X obtained the equity of the spin-off enterprise Company D and was the original major shareholder of the enterprise. However, within less than 10 days after acquiring the equity interest in Company D, Company B transferred the equity of Company D acquired by it to its subsidiary, Company E, in accordance with the second step of the reorganization.

The tax officer held that the transfer did not meet the above requirements from the perspective of time, so the special tax treatment was not applicable to the separation of Company F from Company C to Company D by Group M.

The second step of enterprise equity integration, although it involves the indirect transfer of the equity of Company F in China, is in line with Article 6 of Announcement No. 7 of the State Administration of Taxation in 2015, which is an internal restructuring of the group and has a reasonable commercial purpose, and does not belong to the direct transfer of the equity of Company F in mainland China, so it is not necessary to declare and pay enterprise income tax to the mainland tax authorities on its income.

For the third step transaction, the tax officer agreed with Group M that the transaction had a reasonable commercial purpose and was not required to declare and pay enterprise income tax in China. However, the tax officer argued that through the transfer of the shares of Company E, Group M had essentially divested the S business to which Company F belonged to Group N, and since the S business belonged to Group N, the operating interests related to Company F no longer belonged to Group M, so it was once again proved that the cross-border restructuring business did not meet the conditions for special tax treatment.

After detailed verification and analysis of the various restructuring steps and business details, the tax officer held that the first step of the restructuring business, Company C, which separated the equity of Company F into the newly established enterprise Company D, was to directly transfer the equity of Company F, a mainland resident enterprise. Therefore, Group M should declare and pay enterprise income tax to the mainland tax authorities in accordance with the mainland tax law for its equity transfer.

After the verification and other work was completed, the tax personnel interviewed the representative of the tax-related business of Group M, and the tax officer presented evidence, explained the law, combined with the relevant tax laws and regulations of the mainland and the details of each step of the cross-border restructuring business, explained in detail the tax treatment of the business to the enterprise personnel in a reasonable and well-founded manner, and expressed the handling opinions of the mainland tax authorities.

After several rounds of interviews, Group M finally agreed with the opinion of the mainland tax authorities: according to the relevant provisions of the regulations, this cross-border restructuring business does not meet the conditions for special tax treatment and should be subject to general tax treatment; In the first step of this business, in the process of splitting up and establishing a new enterprise, Company D, Company C directly transferred its equity interest in Company F, a mainland resident enterprise, to Company D, and Group M, to which Company C belongs, should declare and pay enterprise income tax to the Chinese tax authorities on its income derived from sources in China.

Subsequently, the tax officer, together with the enterprise personnel, assessed and verified the equity value and transfer price of Company F, and used this as the basis for tax calculation to determine the income from the equity transfer. In accordance with the provisions of the mainland enterprise income tax law, M Group is required to declare and pay enterprise income tax of RMB 230 million to the mainland tax authorities.

In order to ensure the smooth payment of the tax, the tax officer communicated with Group M on how to remit the money from the overseas bank account and how to convert the foreign currency at the exchange rate. In addition, the Chaoyang District Taxation Bureau has also strengthened communication and cooperation with the Bank of China, which is responsible for foreign exchange settlement, as well as the bank and the treasury department where the special tax account for the treasury is located, to ensure that the tax remittance channel is unimpeded. Recently, with the smooth remittance of 230 million yuan of tax into the warehouse, the tax problem of this special cross-border restructuring business has been successfully resolved, and the relevant tax particles have been returned to the warehouse.

Refine the "granularity" and strengthen the follow-up management of non-resident cross-border restructuring filings

Author: Wang Lei, Deputy Director of the Beijing Chaoyang District Taxation Bureau of the State Administration of Taxation

■Tax case analysis

This case is a typical case in which the mainland tax authorities have strengthened the follow-up management of the cross-border restructuring business of a non-resident enterprise and successfully pursued the enterprise income tax.

In this case, after receiving the filing application for the cross-border restructuring business of the non-resident enterprise involved in the case, the international taxation department of the Chaoyang District Taxation Bureau of Beijing Municipality carefully checked and analyzed the situation and implementation details of each aspect of the restructuring business, and denied the application of special tax treatment to the cross-border restructuring business in accordance with the mainland tax law, and determined that the essence of the enterprise division in the first step of the business was a direct transfer of the equity of the mainland resident enterprise. The enterprise group involved in the case should declare and pay enterprise income tax to the mainland tax authorities on its income derived from sources in mainland China, so as to ensure that the relevant tax is not lost.

Many of the cross-border restructuring businesses of large enterprise groups are characterized by multiple restructuring steps, complex transaction equity structures, multinational enterprises and huge amounts of money, etc., and tax administration is difficult. If the follow-up tax supervision work is not in place, it is easy to generate the risk of tax loss.

Therefore, in the course of day-to-day management, if a non-resident enterprise proposes to the mainland tax authorities that special tax treatment is applicable to its restructuring business after it has carried out cross-border restructuring, the relevant tax authorities shall strengthen follow-up management, carefully verify all aspects and business details of the restructuring business, and conduct a comprehensive analysis of whether the background, purpose and method of the restructuring business are reasonable in combination with the filing materials submitted by the enterprise, analyze and determine whether the restructuring business has a reasonable commercial purpose, and in accordance with the relevant tax laws of the mainland. Verify and confirm whether the business of the enterprise meets the applicable conditions for special tax treatment and whether the general tax treatment can be applied. By refining the "granularity" of management, the follow-up management level of cross-border restructuring filing of non-resident enterprises will be improved to prevent tax loss.

Source: China Tax News; 02.07.2024; Edition: 06. The content of this article is for general information purposes only and is not intended as formal auditor, accounting, tax or other advice, and we cannot guarantee that such information will remain accurate in the future. No person should act on the basis of the information contained herein without having due regard to the relevant circumstances and obtaining appropriate professional advice. The articles reproduced in this issue are for academic exchange purposes only. The original copyright of the article or material belongs to the original author or original copyright owner, and we respect copyright protection. If you have any questions, please contact us, thank you!