Comparison Studies Of China-U.S. Tax-free Merger&Acquisition

Corporate reorganization is the rearrangement of the ownership or the turnover ofcontrolling shareholders of an enterprise, in the aim of optimizing corporate structure andresource distribution, whereby allowing the company to stay competitive in the market byestablishing and enhancing its core competitiveness. Taxation accounts for a major part ofreorganization cost. Under certain circumstances, the law allows for defer of income tax onthe shareholders and corporate level during reorganization. Therefore, to prevent costly cashflow loss through taxation, tax-free reorganization has become the preferred form ofreorganization. The present thesis focuses on the tax-free merger and acquisition (M&A)system of companies, which represents a crucial component of the tax-free reorganizationsystem. By using comparative study method, this thesis provides quantitative case analyses onthe explanation of legal theory and recommendation of legislation. In this work, the currentstate of the legislation of tax-free M&A in China is analyzed and compared with relevantlegislation in the U.S., based on which recommendations for improvement are offered. Thispaper is divided into four parts. Part one differentiates tax-frees M&A from a number ofrelevant concepts and clarifies the main features of tax-free M&A. Part two interprets thespecific types and rules of tax-free M&A as stipulated by "Notice on several issues involvedin income tax during corporate reorganization"(Taxation [2009]59)(Article59) and"Regulation of income tax during corporate reorganization"(National Tax Bureau[2010])(Article4), which serves as an explanation of Article59. The cash flow advantages broughtabout by tax-free M&A is analyzed through case studies. Since Article59of2009referencesU.S legislations for legislative principles and M&A types, the third part of the paper focuseson analyzing corresponding statutory laws, case laws, including U.S. Internal Revenue Code(IRC) section368type A, type B, type C and triangular M&A. Due to the legislative featuresof U.S. tax law, the interpretation is based on statutory laws, case laws and I.R.S decisionletters. This article also features diagrams as well as descriptive narration in analyzing legalcomponents of each tax-free M&A types. Through comparative analyses, part four intends toprovide legislative advice for China’s legislation in this regard, gradually improving China’sregulation and legislation on tax-free M&A. As to legislative principles, it is plausible toloosen the grip on application of legislative principles including reasonable commercial purposes, continue of interest and continue of operation. As to specific tax-free M&A types, itis plausible to lower the stock payment rate under the rule of essence over formality in eachtax-free M&A transaction, improve legislative details and stipulate triangular M&A rulesseparately while adding other complementary legal resorts. By the comparative studies,legislative advice is offered to China’s tax free M&A in the hope of improving the currentlegislation.