Claudia Lin-Wei Zinnack

Mergers and divisions in China may qualify for tax-neutral treatment if certain conditions are met. The People's Republic of China has now relaxed these conditions.

On 8 July 2026, China’s State Taxation Administration issued Announcement No. 13 [2026]. It applies to business reorganizations with a restructuring date as from 1 January 2026 and provides relief for mergers and divisions involving companies with a broader shareholder base.

Tax Neutrality

This possibility of tax-neutral restructuring was originally introduced by Circular No. 59 [2009].

Under certain conditions, the existing tax bases of the relevant equity interests, together with the corresponding transferred and acquired assets and liabilities, may be carried over. The hidden reserves are not triggered at the time of the reorganization. Immediate taxation is therefore avoided.

The parties do not need to apply for and obtain prior approval for tax-neutral treatment. Instead, they must submit the Special Tax Treatment Report Form for Enterprise Income Tax and supporting documents to the competent tax authority, evidencing that the conditions are met, together with the annual enterprise income tax filing for the year in which the reorganization occurs. Without this filing, special tax treatment cannot be applied.

This tax-neutral treatment, however, was previously subject to a strict requirement: all resident enterprise shareholders of the merged or divided enterprise had to agree to it.

New: More Than 50 Percent Instead of Unanimity

Announcement No. 13 [2026] now replaces this unanimity requirement with a partial consent mechanism. Where resident enterprise shareholders holding in aggregate more than 50 percent of the equity interests agree, the following applies: the equity interests held by consenting shareholders, together with the corresponding transferred and acquired assets and liabilities, may be carried over at their original tax bases.

The equity interests of non-consenting shareholders, together with the corresponding assets and liabilities, remain subject to general tax treatment.

Under general tax treatment, the transferred and acquired assets and liabilities are generally recognized at fair value. The hidden reserves are thereby triggered at the time of the reorganization and are generally taxable immediately.

Tax Neutrality and General Tax Treatment Side by Side

Where only part of the shareholder base consents, two tax regimes may apply within the same reorganization. Tax-neutral treatment applies to the consenting portion. General tax treatment applies to the remainder.

New: A Simplified Calculation Method Within General Tax Treatment

What is new is an irrevocable election available to the acquiring enterprise for the portion subject to general tax treatment: instead of restating the tax basis of each acquired asset at fair value item by item, the acquiring enterprise may retain the original tax bases and recognize the aggregate difference between fair value and original tax basis as a separate asset. That asset is amortized evenly over ten years, starting in the tax year in which the restructuring date falls. This simplified method merely reduces the acquiring enterprise's computational burden. It does not affect the taxation of the hidden reserves at the time of the reorganization.

Consent Requirement and Twelve-Month Lock-Up

All resident enterprise shareholders holding at least 5 percent of the equity interests on the restructuring date must agree to the special tax treatment, as well as the ten largest such shareholders. They may not transfer the equity interests received in the reorganization within the following twelve months. If they do, special tax treatment ceases to apply retroactively, and the hidden reserves that were not previously triggered become retroactively taxable, as if general tax treatment had applied from the outset.

The consent threshold also remains relevant for other consenting shareholders. If they transfer their equity interests within twelve months after the reorganization, the aggregate consenting shareholding may fall below 50 percent. In that case, special tax treatment ceases to apply to the entire transaction retroactively, and the hidden reserves become taxable retroactively.

Which Shareholders Are Outside the New Consent Rule?

The new consent threshold applies only to resident enterprise shareholders that are tax resident in China. Shareholders of a merged or divided enterprise may also include individuals, partnerships, other investment vehicles and non-resident enterprises. The new rules do not change their tax treatment. They continue to be taxed under the existing rules.

Conclusion

The new rules remove the previous unanimity requirement for tax-neutral mergers and divisions and reduce the acquiring enterprise's computational burden under general tax treatment. They ease these reorganizations for companies involving a broader shareholder base. The conditions nevertheless remain demanding. The consent threshold, the lock-up period and the simplified basis election within general tax treatment require careful transaction planning. Internationally active companies should assess at an early stage whether and to what extent the new rules can be used for planned reorganizations in China.