CHINA Law and Practice Contributed by: Wei Chen, Yue Zhang, Hao Peng and Yi Sun, JunHe LLP
Conditions for Special Tax Treatment Certain conditions must be satisfied for the rel- evant parties to a spin-off to opt for special tax treatment. They include the following. • The spin-off should have a bona fide business purpose. • All the shareholders of the dividing enterprise should receive the equity in the spin-off enter- prise in proportion to their original sharehold- ing percentage. • The original substantive business operations relating to the transferred assets must remain unchanged for 12 months after the spin-off. • The payment in the form of equity received by the shareholders of the dividing enterprise will be no less than 85% of the total considera- tion. • The major shareholders who receive pay- ment in the form of equity will not transfer the equity obtained for 12 months following the spin-off. 5.3 Spin-Off Followed by a Business Combination A spin-off immediately followed by a business combination is possible. However, if the parties to a spin-off opt for special tax treatment, con- tinuity of business operations and ownership of the equity received as consideration must be maintained for 12 months. A spin-off immedi- ately followed by a business combination may result in tax exposure. 5.4 Timing and Tax Authority Ruling Spin-off is a complex and time-consuming process. The timeframe for a spin-off varies depending on several factors. A spin-off may take several months or even more than one year. The parties are not required to obtain a ruling from the relevant tax authority prior to the spin-
off. They should instead file the relevant docu- ments with the competent tax authority when they complete the annual income tax return for the year in which the spin-off is completed. Where the relevant parties request confirma- tion from the relevant tax authority, application for the confirmation could be submitted to the provincial level tax authority, which in principle should issue the confirmation before the annual income tax return has to be filed. 6. Acquisitions of Public (Exchange-Listed) Technology Companies 6.1 Stakebuilding It is customary to directly or indirectly acquire a stake in a public company prior to making an offer. Where the buyer (through trading at the stock exchange) comes to hold or control 5% of the issued shares of the public com- pany, or (through share transfer by agreement) will come to hold or control 5% or more of the issued shares of the public company, the buyer will have to, within three trading days, submit a written report to CSRC and the relevant stock exchange; notify the public company; and make an announcement. For each subsequent increase or decrease of 5% in the shareholding, the buyer will be sub- ject to the same reporting and announcement obligations. Furthermore, for each increase or decrease of 1% in the shareholding, the buyer will have to notify the listed company within the next trading day, and the listed company will make an announcement accordingly. Where the buyer comes to hold or control 5% or more, but less than 20%, of the issued shares of
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