Circular 14 on mergers and acquisitions

Last month, the State Council issued the Circular 14, with many measures to boost merger and acquisition (M&A) operations, in order to encourage enterprises to get bigger and stronger through M&A. As such, new tax measures related to M&A have been implemented.

The major one deals with VAT exemption. Where a taxpayer transfers its physical assets and debt-claims, debts and labor force related thereto to other entities or individuals through combination, division, sale and replacement in the course of asset restructuring, such a transfer shall not be subject to VAT. The same treatment is to be applied to the transfer of goods involved in these operations.

The Circular also modifies the Corporate Income Tax (CIT) treatment for investment with non-monetary assets. Due to its complexity, the implementation of CIT rules on M&A is much difficult than that of VAT rules, which calls for close supervision from authorities.

Circular 14 also brings new measures in different areas, e.g. administrative approval, finance, land, labor... The promise of this circular is to bring a more favorable M&A environment, which requires both the Ministry of Finance and the State Administration of Taxation to take action and issue clarification on the implementation of the rules.