Study On Legal Issues Of Income Tax Law Of Stock Acquisition In China

Acquisition is a corporate action in which a corporation buys most, if not all, of the target corporation's ownership stakes in order to assume control of the target corporation. The gain from the transfer of stock causes income tax consequences and treatments in such course which can be categorized into taxable stock acquisition and tax-free stock acquisition depending on the transaction structures and considerations from a micro perspective under national macro control. The main issues to be dealt with are whether the gain or loss of the shareholders of the target corporation should be recognized, how to determine the tax basis on the gain or loss of the stock of the acquired corporation and the income tax issues of the transferor in connection with the transaction so as to calculate the gain or loss whether recognized immediately after the transaction or deferred for a later time. This article deals with income tax issues involving the three principal parties-the acquiring corporation, shareholders of the target corporation and the target corporation in an acquisition in China's specific situation incorporated with references from relevant rules of the US Tax Law to identify the deficiencies. This article has four chapters apart from the preface and epilogue.Chapter One introduces the concept and classification of stock acquisition as well as related taxation theories and principles. Starting with the different tax treatments resulting from different considerations, tax policies and issues concerning general tax treatment are introduced followed by a brief discussion on the selections of classification of transactions and target enterprise through revenue synergistic effect analysis from a tax-policy macro perspective in an acquisition. The principle of tax legitimacy, material imposition principle, principle of tax equality and neutral principle of taxation to be followed in the constitution of statutory taxation were then discussed, thus to explicate the importance of tax cost in stock acquisition and significance of a sophisticated tax law in the smooth completion of acquisition.In Chapter Two, The US income tax system is introduced from the perspective of positive law in Chapter Two. Relevant provisions of the Internal Revenue Code and Treasury Regulations are described. Provisions regarding treatments to taxable and tax-free stock acquisitions as well as qualifications and requirements for transaction structure, the essential elements of acquisition bona fides and the tax treatment of main parties of the statute law and common law are discussed. Systems concerning stock acquisition such as stock-for-stock and deemed asset acquisition as defined in Reg.§1.358–6 (b) of the Internal Revenue Code are mainly dealt with.In Chapter Three, China's tax laws applicable to stock acquisitions of domestic corporations are compared with those of the US's so as to discuss the different tax treatments in the acquiring corporation, shareholders of the target corporation and the target corporation in connection with taxable and tax-free stock acquisitions. Sec. 338 and Sec. 368 of the Internal Revenue Code are introduced in the discussion of the provisions regarding tax treatments in terms of transaction, form and main parties in stock acquisitions in the making of the common law. The new requirements in Caishui [2009] No.59 and SAT [2010] No.4 are referred to and the changes in China's tax law, rules and policies briefly reviewed thus to bring up the controversies in these two notifications. Analysis is conducted to find out if such controversies are inappropriate based on the general rules of tax law and applicable US law. Some reorganization of large domestic state-owned enterprises is briefly analyzed to examine if such transactions conform with the revised rules and logic in the corresponding provisions in Caishui [2009] No.59.In Chapter Four, room for further improvements in the current Chinese law regarding income tax regulations applicable to stock acquisitions is illuminated, such as reference and adoption of systems in which taxable stock acquisition is deemed to be taxable assets acquisition, and shares holding time element as the prerequisite and requirements for qualified tax-free stock acquisition as provided in the US tax law, and the authority should further clarify the tax basis adjustment rules, the rule of continuity of interest of the shareholders, etc.