Updates to China’s Corporate Restructuring Tax Rules

The Chinese State Administration of Taxation (“SAT”) recently issued the “Announcement on Issues Concerning the Tax Administration of Corporate Restructuring for Income Tax Purposes” (SAT Announcement 2026 No. 13, hereinafter referred to as “Announcement No. 13”), which makes significant revisions to the income tax administration for corporate mergers and spin-offs.

This update relaxes the shareholder consistency requirements for neutral tax treatment applied to domestic restructuring in China, providing more operational flexibility for intra-group structural integration. However, for mergers and spin-offs conducted by subsidiaries of multinational enterprises in China, tax uncertainties have increased following the implementation of the new regulations, requiring groups to exercise more caution during the structuring phase. This article outlines the core changes and highlights key risk considerations for such transactions.

Announcement No. 13 applies retroactively to all corporate restructuring for which the legal procedures for merger or spin-off were completed on or after 1 January 2026. And the major changes are summarized as follows:

Loosen the shareholder consistency requirements for neutral tax treatment

Old rules: To qualify for neutral tax treatment in mergers and spin-offs, unanimous consent from all shareholders of the merged or spun-off entity was required, creating a high practical threshold.

New rules: Neutral tax treatment may be partially applied if both of following two conditions are met:

• Unanimous consent from all resident enterprise shareholders holding 5% or more of the shares, as well as from all of the top ten resident enterprise shareholders;
• The aggregate shareholding of resident enterprise shareholders who consent to the neutral tax treatment must account for more than 50% of the total equity of the entity being merged.

“Dual-track tax treatment” allowed for a single restructuring

A single merger or spin-off could be split for tax purposes:

• Resident enterprise shareholders who reach an agreement may apply neutral tax treatment to their respective shares of assets and liabilities;
• The remaining equity shares are uniformly subject to general tax treatment.

General tax treatment introduces two mechanisms for tax basis (once selected, cannot be changed)

General approach:

• The tax basis for each individual asset and liability is determined based on fair market value respectively;

Simplified approach:

• The original tax basis of the merged entity is adopted as whole, and the difference between fair market value and the original tax basis is recognized separately as an asset and starting from the reorganization date amortized over 10 years before tax averagely.

12-month tax compliance monitoring period following the restructuring

The new regulations establish a 12-month equity monitoring requirement. For resident enterprise shareholders holding 5% or more of the equity and the top ten resident enterprise shareholders, if they transfer the shares acquired through the restructuring within 12 months, or if other shareholders with consensus transfer their shares within 12 months, resulting in the total shares held by the resident enterprise with consensus falling below 50%, all neutral tax treatments that have taken effect under the restructuring will become invalid. Once the conditions for invalidation are triggered, all shareholders must retroactively adjust their tax treatment in full to general tax treatment, file amended returns, and pay back taxes, with the risk of incurring late payment penalties.

Special note on cross-border restructuring

Although Announcement No. 13 generally loosens the eligibility criteria for domestic restructuring in China, it will have significant practical implications for mergers and demergers of Chinese subsidiaries under the common control of non-resident enterprise shareholders.

According to Article 7 of Cai Shui [2009] No. 59, the application of neutral tax treatment to cross-border restructuring is limited to three statutory scenarios. Yet, the provision does not explicitly clarify whether mergers and demergers of Chinese subsidiaries held under the common control of non-resident enterprise shareholders are subject to these provisions.

In past practice, local tax authorities have had differing interpretations and varying standards of enforcement regarding whether such transactions should be subject to Article 7. Following the implementation of the new regulations, the flexibility in enforcement standards for such transactions has narrowed. At the same time, since restructurings are subject to a record filing system and the tax authorities may only perform post-hoc reviews, the overall tax uncertainty associated with these transactions has significantly increased.

Therefore, it is recommended that multinational enterprises conduct a preliminary assessment of the relevant tax implications when planning mergers or divisions of their Chinese subsidiaries:

• If the overall appreciation of the enterprise’s assets is limited and there are no substantial restructuring gains at the shareholder level, even if general tax treatment applies – where the merged entity recognizes and pays taxes on gains based on fair market value, and the surviving entity simultaneously adjusts the tax basis of its assets to fair market value, the resulting tax burden will be limited, and the transaction may proceed as planned.
• If the transaction results in substantial capital gains at the level of non-resident shareholders, and if the transaction is determined to be subject only to general tax treatment, it will result in a relatively high tax burden. In such cases, the group should optimize the transaction structure, adjust the transaction model, and extend the overall execution timeline, while conducting systematic tax planning in advance to mitigate tax risks associated with the restructuring.