On March 20, Suntech, a Chinese solar manufacturing company, declared bankruptcy. Questions have arisen on how the country’s solar industry will now cope with overcapacity issues which stem from a decline in demand from Europe. The declaration comes a week after the company announced it had defaulted on $541 million of bonds.

To deepen government reform and improve government efficiency, the State Council of the People's Republic of China recently released the Plans for Government Institutional Reform and Function Change (the Restructuring Plan), and was approved by People’s Congress at its first session and it took effect on March 14, 2013.

Understanding your rights as a creditor while navigating under China’s bankruptcy laws is becoming a must these days, especially for foreign creditors. As many foreign companies engage in business with Chinese companies, chances are likely that you will encounter a failing Chinese company that will file for bankruptcy in China. A China bankruptcy filing can have a tremendous impact upon foreign creditors.  If you are doing business with Chinese companies or have investments in Chinese companies, you should be aware of your rights as a creditor under Chinese bankruptcy laws.

Key Points

• Announcement 72 to elaborate on how the cross-border equity transfer can qualify for the special tax treatment
• Clarifies the rules to ensure no tax-avoidance purpose would be involved in the restructure as well as sets forth the rule on relevant filing procedures

Background

On April 30, 2009, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Caishui [2009] No. 59 (“Circular 59”) to set out the guidelines on the income tax treatment of enterprise reorganizations (please refer to our China Tax Bulletin May 2009 for more information about Circular 59).

OVERVIEW

This note outlines the various formal insolvency proceedings available in the People's Republic of China (excluding for purposes of this guide, the special administrative regions of Hong Kong and Macao and the territory of Taiwan) ("PRC").

《国家税务总局关于纳税人资产重组有关增值税问题的公告》(02/18/2011)

The State Administration of Taxation released the Announcement onIssues Concerning Value-Added Tax Relevant to Taxpayers’ Assets Restructuring (the “VAT Announcement”) on February 18, 2011. The effective date of the Announcement is March 1, 2011.

China’s corporate income tax (« CIT ») regime effective from January 1, 2008 explicitly requires corporate restructuring transactions to be effected at fair value so that any gain or loss shall be recognised for tax purpose at the time when the transaction takes place. The Chinese State Administration of Taxation (« SAT ») has released several tax circulars in recent years to address the detailed CIT treatments (e.g. the availability of tax deferral treatment for a corporate restructuring meeting certain prescribed criteria), the documentation and procedural requirements, etc.

Norwest Holdings Pte Ltd (in Liquidation) v Newport Mining Ltd [2011] SGCA 42

Responsive to issues faced with difficulty in obtaining financing by businesses (particularly small- to medium-size enterprises) due to the global financial crisis, State Administration of Industry and Commence officially released Administrative Measures for Corporate Debt-for-Equity Swap Registration (the “Measures”) recently, which formalizes regulation of debt-for-equity swap on the national level. The Measures will be put into implementation on January 1, 2012.