CHINA Law and Practice Contributed by: Borong Liu, Xiaoli Liu, Jingyi Lu and Zhijie Zhang, Zhong Lun Law Firm
6.4 Construction of Bankruptcy-Remote Transactions Since China has formulated specialised regu - lations for various types of securitisations, the transaction structures are relatively “fixed” under the relevant regulations. For now, bankruptcy remoteness can only be achieved through the two means outlined in 6.2 SPEs . In most trans - actions, one layer of SPV is sufficient. In other cases where two SPVs are adopted, the first SPV (usually an SPT) is set up to generate the underlying assets (for example, granting a com - mercial mortgage loan using bridge funds), and then the settlor of the first SPT will transfer the beneficiary right under the SPT to the second SPV to issue securities. Generally, the two-layer structure is not aimed to strengthen bankruptcy- remoteness, but to structure an underlying asset that meets the requirements of securitisation. 6.5 Bankruptcy-Remote SPE Limited recourse and non-petition provisions are commonly used in the transaction documents. Limited Recourse Provision It is usually agreed that investors understand and recognise that the securities held by them only represent corresponding beneficial rights and shall not be regarded as liabilities of the trustee or plan manager. Except for wilful misconduct, bad faith, negligence or breach of its obliga - tions under the transaction documents, inves - tors’ recourse against the trustee/plan manager shall be limited to the SPV property and to the amounts available for use in accordance with the payment order stated in the agreement. The security holders shall have no claim or recourse against the SPV or the trustee/plan manager for the amounts that remain unsatisfied after the management and disposal of the SPV property and/or the realised proceeds thereof.
Non-Petition Provision Non-petition clauses protect the SPT against insolvency actions by transaction parties, espe - cially the security holders. It is usually agreed that each of the parties undertakes that during the life of the SPT or for a period agreed by all parties, it shall bring no lawsuit or arbitration proceeding for the purpose of terminating the SPT. However, it would also be made clear that such non-petition clauses shall not be regarded as limiting the right of any party to bring a law - suit or arbitration proceeding against any party in respect of any loss caused by such party as a result of its fraudulent or wilful misconduct. Except for a transfer of the financial products stipulated in the Notice on Full Launch of the Pilot Scheme on Levying Value-Added Tax in Place of Business Tax (Ministry of Finance [2016] No 36), a transfer of financial assets is not cur - rently subject to value-added tax (VAT). The transfer of underlying assets is not subject to stamp duty as well because a trust agreement or a purchase and sale agreement in asset securiti - sation transactions are not regarded as taxable documents listed in the Stamp Duty Law (2022). A potential tax on the transfer of underlying assets is income tax. If the transfer price is great - er than the tax basis of the transferred assets (ie, the historical cost or the actual amount of costs incurred in the acquisition of the assets), then enterprise income tax may be due on the taxable income. In practice, since the financial assets are usually transferred at parity or at a discount on their historical cost, usually no income tax is due on the transfer. 7. Tax Laws and Issues 7.1 Transfer Taxes
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