State Taxation Administration Issues Document Clarifying Collection and Administration Issues Concerning Income Tax Treatment of Enterprise Reorganization

Announcement of the State Taxation Administration on Certain Collection and Administration Issues Concerning Income Tax Treatment of Enterprise Reorganization (2026 No. 13)

Recently, the State Taxation Administration issued the "Announcement on Certain Collection and Administration Issues Concerning Income Tax Treatment of Enterprise Reorganization" (2026 No. 13, hereinafter referred to as the "Announcement"). This policy is primarily applicable to enterprises with relatively dispersed equity structures and complex shareholder compositions (including corporate shareholders, individual shareholders, partnerships, etc.), and is also specifically formulated for merger and division transactions of listed companies. The following is an interpretation of the Announcement:

1 What is the background for issuing the Announcement?

To encourage enterprise mergers and acquisitions (M&A), the state has introduced special tax treatment policies for corporate reorganizations, allowing eligible enterprises to defer the recognition of taxable gains on transferred assets at the time of reorganization to future years, thereby effectively reducing the immediate tax burden of the reorganization.

In recent years, merger and division reorganization transactions have increased. Under current rules, all parties to the same reorganization must adopt a consistent tax treatment principle, i.e., uniformly apply either general or special tax treatment. However, in practice, some companies—especially listed companies—have numerous shareholders of various types, including individuals, partnerships, contractual asset management products, and non-resident enterprises. Even if they otherwise meet the conditions for special tax treatment, it is often difficult to obtain unanimous agreement from all shareholders, thus making special tax treatment unavailable. To encourage enterprises to integrate resources and grow, and based on extensive input from taxpayer representatives, relevant authorities, and grassroots tax bureaus, the STA issued this Announcement. While adhering to the fundamental principles of special tax treatment, it appropriately relaxes the consistency requirement to improve the policy's practicality.

2 For an eligible merger to apply special tax treatment, is it necessary for all shareholders, the merged enterprise, and the merging enterprise to reach an agreement?

No. Previously, documents such as the "Announcement of the State Taxation Administration on Issuing the Measures for the Administration of Enterprise Reorganization Corporate Income Tax" (2010 No. 4) required all parties to the same reorganization to adopt a consistent tax treatment approach. The Announcement optimizes this requirement.

Under the Announcement, at the shareholder level of the merged (or divided) enterprise, if the resident corporate shareholders holding no less than 5% of the shares and the top ten resident corporate shareholders reach an agreement, and the aggregate shareholding of such agreeing resident corporate shareholders exceeds 50%, then the shares held by the agreeing shareholders, as well as the corresponding assets and liabilities transferred by the merged (divided) enterprise and acquired by the merging (dividing) enterprise, may be eligible for special tax treatment.

Example 1: Suppose Enterprise A merges with Enterprise B through absorption. Enterprise B has four shareholders: Shareholder A (resident enterprise, 45%), Shareholder B (individual, 40%), Shareholder C (resident enterprise, 10%), and Shareholder D (resident enterprise, 5%). Under the Announcement, if Shareholders A, C, and D reach an agreement with the merged and merging enterprises on special tax treatment, the aggregate shareholding of the agreeing resident corporate shareholders is 60%, exceeding the 50% threshold. Thus, if other conditions are met, special tax treatment may apply.

3 If resident corporate shareholders holding more than 50% in aggregate reach an agreement on special tax treatment with the merged (dividing) and merging (divided) enterprises, how should the parties handle tax treatment, assuming other conditions are met?

The Announcement provides that for mergers and divisions, if the agreeing resident corporate shareholders hold more than 50% of the shares of the merged (divided) enterprise and reach an agreement with the relevant enterprises on applying special tax treatment, the shares held by those agreeing shareholders and the corresponding assets and liabilities transferred by the merged (divided) enterprise and acquired by the merging (dividing) enterprise may be subject to special tax treatment. The remaining shares and corresponding assets and liabilities shall be subject to general tax treatment.

Example 2: Continuing from Example 1, Enterprise A absorbs Enterprise B with 100% equity consideration. Shareholders: A (resident enterprise, 45%), B (individual, 40%), C (resident enterprise, 10%), D (resident enterprise, 5%). Enterprises A, B, and Shareholders A, C, and D reach an agreement on special tax treatment. Assuming other conditions are met, the tax basis of Enterprise B's assets and liabilities is RMB 10 million, and fair value is RMB 18 million. The parties shall handle tax treatment as follows:

Agreeing shareholders A, C, and D apply special tax treatment and temporarily do not recognize equity transfer gains. Shareholder B shall be taxed in accordance with individual income tax rules.

The portion of assets and liabilities corresponding to the shares held by the agreeing resident corporate shareholders applies special tax treatment (no gain recognized currently); the remainder applies general tax treatment (gain recognized currently). With A, C, and D collectively holding 60%, 60% of Enterprise B's transferred assets and liabilities qualify for special treatment (no gain recognized currently), while the remaining 40% shall recognize a gain of RMB 3.2 million [(18M – 10M) × 40%] in the current period.

The portion of assets and liabilities acquired by the merging enterprise corresponding to the agreeing shareholders' shares applies special tax treatment, with tax basis determined based on the original tax basis of the merged enterprise. The remaining portion applies general tax treatment, with tax basis determined at fair value. Thus, Enterprise A acquires 60% of Enterprise B's assets and liabilities with a tax basis of RMB 6 million (10M × 60%), and the remaining 40% with a tax basis of RMB 7.2 million (18M × 40%).

4 When a portion of the merged assets and liabilities applies special tax treatment and the remainder applies general tax treatment, how should the merging enterprise handle the tax treatment of the portion subject to general treatment?

Under general tax rules, after assets and liabilities are bifurcated between special and general treatment, the merging enterprise should determine the tax basis for each individual asset and liability accordingly. For example, in Example 2, if a particular asset of Enterprise B has a tax basis of RMB 1 million and fair value of RMB 2 million, Enterprise A's tax basis for that asset would be RMB 1.4 million (1M × 60% + 2M × 40%). Recognizing that such detailed allocation may impose a high administrative burden in some mergers involving numerous assets and liabilities, the Announcement provides an optional simplified method: The merging (dividing) enterprise may elect to retain the original tax basis for the portion subject to general tax treatment, and treat the difference between the fair value and the original tax basis as a separate asset, to be amortized evenly over 10 years starting from the year of the reorganization date. This election, once made, is irrevocable.

Example 3: Continuing from Example 2, the portion of assets and liabilities subject to general tax treatment has a tax basis of RMB 7.2 million (18M × 40%). Enterprise A may either determine the tax basis for each individual asset/liability separately, or elect the simplified method: retain the original tax basis of RMB 4 million (10M × 40%) for the acquired assets/liabilities, and treat the difference of RMB 3.2 million (7.2M – 4M) as a separate asset to be amortized evenly over 10 years from the reorganization year, deductible for tax purposes.

5 In a merger, if the agreeing resident corporate shareholders hold more than 50% in aggregate, but there are resident corporate shareholders holding no less than 5% or among the top ten that have not reached an agreement, can the agreed-upon portion still apply special tax treatment?

Under Article 1 of the Announcement, for special tax treatment to apply, all resident corporate shareholders holding no less than 5% of the shares and the top ten resident corporate shareholders (by shareholding) must reach an agreement. Conversely, even if the aggregate shareholding of agreeing resident corporate shareholders exceeds 50%, if any resident corporate shareholder holding no less than 5% or any of the top ten resident corporate shareholders has not agreed, the entire transaction cannot qualify for special tax treatment under the Announcement.

Example 4: Enterprise A (listed company) plans to absorb Enterprise B. Enterprise B has 14 shareholders, including Shareholder C (individual), Shareholder N (partnership), and the rest are resident corporate shareholders. Shareholding details are as follows:

Scenario 1: All resident corporate shareholders agree; individual C and partnership N do not agree. Agreeing resident corporate shareholders hold 86% in aggregate, exceeding 50%. Special tax treatment under the Announcement may apply.

Scenario 2: Resident corporate shareholder K, individual C, and partnership N do not agree; all others agree. Agreeing resident corporate shareholders hold 79% in aggregate. Although exceeding 50%, K is among the top ten resident corporate shareholders and holds more than 5%, but has not agreed. Therefore, special tax treatment under the Announcement cannot apply.

Scenario 3: Resident corporate shareholder M, individual C, and partnership N do not agree; all others agree. Agreeing resident corporate shareholders hold 80% in aggregate. Although exceeding 50%, M holds more than 5% of the shares and has not agreed. Therefore, special tax treatment under the Announcement cannot apply.

6 If special tax treatment applies to the agreed portion of a merger, may the resident corporate shareholders holding no less than 5% or the top ten resident corporate shareholders transfer the shares acquired within 12 months? If they do, how should tax treatment be adjusted?

To ensure continuity of interest, the Announcement stipulates that shareholders holding no less than 5% of the shares of the merged (divided) enterprise and the top ten resident corporate shareholders at the reorganization date must not transfer the shares acquired within 12 consecutive months following the reorganization. If such shareholders transfer shares within that 12-month period, the conditions for special tax treatment are no longer met, and the parties must adjust their tax treatment accordingly.

Example 5: Continuing from Scenario 1 of Example 4, the reorganization date is October 31, 2026. Enterprise B's assets/liabilities have a tax basis of RMB 10 million and fair value of RMB 20 million. Special tax treatment applies to the portion agreed upon by resident corporate shareholders. The merged enterprise B recognizes a gain of RMB 1.4 million [(20M–10M) × (100%–86%)]; the merging enterprise A determines tax basis as RMB 11.4 million (10M×86% + 20M×14%); resident corporate shareholders applying special treatment do not recognize gain currently.

Nine months after the reorganization, resident corporate shareholder M (holding 6%) transfers shares of listed company A. Then all parties must retroactively apply general tax treatment: Enterprise B must recognize an additional gain of RMB 8.6 million (20M–10M–1.4M); Enterprise A must restate its tax basis at RMB 20 million; and all resident corporate shareholders must re-determine their gains.

7 If special tax treatment applies to the agreed portion of a merger, are there restrictions on the transfer of shares within 12 months by agreeing shareholders who hold less than 5% and are not among the top ten resident corporate shareholders?

To prevent abuse, the Announcement provides that if other agreeing shareholders (excluding those holding no less than 5% and the top ten) transfer shares within 12 months after the reorganization, and as a result the aggregate shareholding of agreeing resident corporate shareholders falls below 50%, special tax treatment will no longer apply, and all parties must make corresponding adjustments.

Example 6: In July 2026, Enterprise A absorbs Enterprise B. Agreeing resident corporate shareholders hold 51% in aggregate. Shareholder A (resident enterprise, not among the top ten, holding 4% of B) agrees to special tax treatment with other parties. After the merger, Shareholder A receives 2% of Enterprise A's shares. In December 2026, Shareholder A transfers 1% of Enterprise A's shares, which corresponds to 2% of Enterprise B's shares that no longer agree. The agreeing proportion drops to 49%. Even if other conditions are met, this merger cannot apply special tax treatment.

8 For a merger applying special tax treatment, may the shareholders of the merged enterprise include partnerships, contractual asset management products, or non-resident enterprises?

To support M&A completion, the "Announcement on Certain Issues Concerning the Administration of Enterprise Reorganization Corporate Income Tax" (2015 No. 48) already extended the scope of shareholders in mergers and divisions to include individuals. Building on that, this Announcement further expands the scope to include partnerships, contractual asset management products, and non-resident enterprises.

Example 7: Enterprise A absorbs Enterprise B. Shareholders of Enterprise B: A (resident enterprise, 30%), B (resident enterprise, 30%), C (individual, 20%), D (partnership, 10%), E (contractual private equity fund, 6%), F (non-resident enterprise, 4%). Here, Shareholders A and B collectively hold 60%, exceeding 50%. If they reach an agreement with Enterprises A and B and other conditions are met, Enterprises A and B, and Shareholders A and B, may apply special tax treatment.

9 When does the Announcement take effect?

Given that corporate income tax is settled annually, the Announcement applies to reorganization transactions with a reorganization date on or after January 1, 2026.

Example 8: Enterprise A absorbs Enterprise B. The merger agreement becomes effective on October 1, 2025; accounting completion occurs on October 31, 2025; and the market entity registration change is completed on January 31, 2026. Under the "Announcement on Certain Issues Concerning the Administration of Enterprise Reorganization Corporate Income Tax" (2015 No. 48), the reorganization date is January 31, 2026, so this Announcement applies.