CHINA Law and Practice Contributed by: Nelson Zhou, Yifeng Yuan, Jianwei Yang and Jingbo Zhou, JunHe LLP
tual subordination arrangements between the senior creditor, the subordinated creditor and the debtor are generally recognised by PRC law. 7.2 Claw-Back Risk When the target company provides security to an acquirer within the claw-back period before filing for bankruptcy (one year before the court’s acceptance of a bankruptcy petition), such secu- rity may be viewed as a preferential or fraudu- lent property transfer by the target company. The bankruptcy administrator may then decide to void such security provision and recover the property if they can prove that the property trans- fers were made with the intent to hide assets or that the transfers of property were for less than the fair market value before the bankruptcy of the target company. There are not many such precedents in PRC insolvency law practice. The main mitigant could be that such security creation was approved by a shareholders’ meet- ing of the target company, with the connected shareholder refraining from voting on said reso- lution. PRC tax authorities will generally charge each lender and borrower stamp tax of 0.05% of the committed loan amount. 8.2 Withholding Tax/Qualifying Lender Concepts There is no withholding tax if both the bor- rower and the lender are PRC entities. An off- shore lender that does not have any presence in the PRC but receives profits, interest or other income from the onshore borrower is subject to withholding tax on that income. The withhold- 8. Tax Issues 8.1 Stamp Taxes
ing tax rate is 10%, unless the offshore lender is from a jurisdiction with which the PRC has entered into a tax treaty that allows a preferential rate. 8.3 Thin-Capitalisation Rules According to the PRC Enterprise Income Tax Law, the interest expenses paid by a PRC company to its affiliates for outstanding loans not exceeding the prescribed ratio of the debt investment and equity investment from its affili- ates are deductible for corporate income tax purposes, while the interest expenses for the excess portion of loans may not be deductible. The prescribed ratio of debt investment and equity investment is generally 2:1, except in the case of financial enterprises, where the ratio will be changed to 5:1. The PRC Company Law regulates the joint stock company’s provision of financial assistance in the context of such company being taken over. The company shall not provide gifts, loans, guar- antees or other financial assistance to another person to facilitate its acquisition of shares of the company or its parent company, unless doing so is: • to implement employee stock ownership plans; or 9. Takeover Finance 9.1 Regulated Targets • for the benefit of the company, as resolved by the shareholders’ meeting or the board of directors (in accordance with the articles of association or the authorisation of the shareholders’ meeting, and with the affirma- tive votes of not less than two thirds of all directors), and the cumulative total amount of
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