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Measures for the Handling
of Income Taxes in the Debt Restructuring
of Enterprises
Decree [2003] No.6 of State Administration of Taxation
Article 1 In order to strengthen the administration of income tax in
the debt restructuring of enterprises, and to prevent the loss of
tax revenue, these Measures are enacted in accordance with the
Provisional Regulations of the People's Republic of China on
Enterprise Income Tax and the implementation rules thereof.Article 2 Debt
restructuring as used in these Measures refers to all
the mattes involving modification of debt terms between the creditor
(enterprise) and the debtor (enterprise).
Article 3 Debt restructuring can be done in any or all of the
following methods:
1) Paying off the debts by cash lower than the assessable cost of
the debts;
2) Paying off the debts by non-cash assets;
3) Transferring the debts to capital, including debt-equity swap of
state-owned enterprises;
4) Modifying other debt terms, such as extending the repayment
period, extending the repayment period and collecting extra
interests, extending the repayment period and reducing the capital
or interest of the debts etc;
5) Mixed restructuring by combining two or more of the aforesaid
methods.
Article 4 Where the debtor (enterprise) pays off the debts by
non-cash assets, except that the enterprise is restructured or there
are otherwise liquidation provisions, the handling of income tax
shall be divided into two economic operations, namely, the
transferring of the non-cash assets at fair value, and the paying
off of debts with the amount equivalent to the fair value of the
non-cash assets. The debtor (enterprise) shall confirm the transfer
income (or loss) of the relevant assets; for the non-assets acquired
by the creditor (enterprise), the assessable cost shall be
determined according to the fair value of the relevant assets
(including the taxes relating to the transfer of assets), and thus
to calculate the expenses for depreciation of fixed assets, the
expenses for amortization of intangible assets or the sale cost
carried forward etc that shall be deducted before payment of the
enterprise income tax.
Article 5 In the debt restructuring of transferring debts to
capital, except that the enterprise is restructured or there are
otherwise liquidation provisions, the debtor (enterprise) shall
confirm the balance between the book value of the restructured debts
and the fair value of the equity enjoyed by the creditor for giving
up the creditor''s rights as the income of debts restructuring, and
include that income in the taxable income of the current period. The
creditor (enterprise) shall confirm the fair value of the equity it
enjoyed as the assessable cost of the investment.
Article 6 In the debt restructuring in which the creditor''s
concessions to the debtor include paying off the debts by cash or
non-cash assets lower than the assessable cost of the debts etc, the
debtor shall confirm the balance between the assessable cost of the
restructured debts and the amount of the cash paid or the fair value
of the non-cash assets as the income of debt restructuring, and
include that income in the taxable income of the current period. The
creditor shall confirm the balance between the assessable cost of
the restructured debts and the cash or fair value of the non-cash
assets received as the loss of debt restructuring of the current
period to offset the taxable income.
Article 7 In the debt restructuring by modifying other debt terms,
the debtor shall write down the assessable cost of the restructured
debts to future payable amount, and the amount written down shall be
confirmed as the income of debt restructuring of the current period.
The creditor shall write down the assessable cost of the credits to
future receivable amount, and the amount written down shall be
confirmed as the loss of debt restructuring of the current period.
Article 8 If an enterprise's income of asset transfer or of debt
restructuring confirmed as a result of paying off debts by non-case
assets or of the creditor's concessions is of considerably large
amount, and it is really difficult to pay the tax once-off, the tax
may be evenly included in the payable income of each year within a
period no longer than 5 tax years.
Article 9 In debt restructuring between associated parties that
include such concession terms as one party shall transfer profits to
the other party, if there are reasonable business needs and any of
the following conditions is met, the tax may be handled respectively
pursuant toArticle s 4 to 8 of these Measures upon approval of the
tax authorities:
1) As supported by a court ruling;
2) There is an agreement of consent all of the creditors;
3) In case of approved debt-equity swap of state-owned enterprise.
Article 10 If the debt restructuring including concession terms
between associated parties is not in conformity with the conditions
provided inArticle 9 of these Measures, the creditor may not, as a
general principle, confirm the concession as restructuring loss, but
as donation, and the debtor shall confirm the donation income. If
the debtor is a shareholder of the creditor, the concession of the
creditor shall be assumed as the distribution to the shareholders by
the enterprise, and be handled according to Item 2) of Article 1 of
the Notice of the State Administration of Taxation on Several Issues
of Income Tax on Equity Investment of Enterprises (GuoShuiFa [2002]
No.118).
Article 11 The fair value as used in these Measures refers to the
fair purchase value of the transactions between independent
enterprises.
Article 12 These Measures shall enter into force on March 1, 2003. |
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