China tax - M&A: Pre-deal structuring and planning

China's accelerated economic reforms and further liberalisation of the market place have resulted in an increasing level of Mergers and Acquisitions ("M&A") activities for both foreign and domestic investors. Strategic investors look to M&A in order to increase their market share and to realise opportunities in various business sectors that, in the past, remained highly regulated. The privatisation program of state-owned enterprises, de-regulation of various previous restricted industries, and the emergence of the asset management companies for non-performing loans all act as the catalysts for the increasing M&A activities in China.

Why PRC tax planning and structuring are essential in pre-deal stage?

Advisory on a tax efficient acquisition structure: asset deal versus share deal. Under both the asset or share deal, tax planning is essential in maximising the tax saving opportunities as well as to manage the downside tax risks and exposures associated with M&A transactions.
Designation of a flexible and tax efficient holding structure which has built-in flexibility for future restructuring and for exit purposes as well as facilitating the tax efficient repatriation of profits out of China.
Advisory on a tax efficient financing structure: Debt versus equity financing. Foreign investors looking to leveraging their invested capital would need to give careful consideration to the thin-capitalisation rule in China. Tax planning is required in order to minimise the PRC withholding tax and host country tax on the interest income. Foreign investors should also consider maximising the leveraging to obtain tax deductions on the interest incurred on the borrowing as well as obtaining additional tax benefits.
Transaction supports, including deal negotiation supports; review of the draft contracts and agreements from the tax and commercial perspectives especially the walk-away clauses, warranty and tax indemnity clauses as well as back-up arrangement (e.g. escrow arrangement); translate documents; confirm unclear tax issues with the authorities; structuring a technology transfer, feasibility studies, and general tax and business technical supports.