Group restructuring in China: Fair Market Value Assessment


published on 8 July 2022 | reading time approx. 2 minutes

Cross-border group reorganization is commonly seen these years as assets and resouces allocation optimization tool, in particular to adapt the rapid busienss enviroment changes under global pandemic.


According to the current Chinese tax law and regulation, for a direct share transfer in cross-border group reorganizaiton, it might be eligible to tax neutrality if certain criteria are met. Nevertheless comparing to domestic reorganizaiton, a cross-border reorganizaiton set much stricter criteria for the shareholding relationship between  transferor and transferee for enjoying the tax neutrality. Thus in practice many cross-border reorganizations may not have chance to apply for tax neutrality.


When a tax neutrality is not applicable in China for a group reorganizaiton, the direct share transfer may trigger capital gains tax in China.


Fair Market Value ("FMV") determination

Company valution is crucial in M&A practice, as the taxable basis of a share transfer. In practice, market comparable price, discounted cash flow method or replacement method may apply depending on individual cases.


The capital gains determination for a non-resident enterprise selling its shares in a Chinese entity depends on the equity transfer price and the cost of equity investment.


If the set transfer price for a group reorganization is not deemed as  in consistent with the arm's length principle, the Chinese tax authority has right to adjust the taxable price to the FMV of the tranferred Company.


In practice, when the transferred Chinese company does own significant real estate property which may lead to premium comparing to the bookkeeping value, a local appraisal report might be helpful as reference of FMV determination.


When no real estate is relevant and the transferred company is under normal business operation, in practice it might be also acceptable that the net assets of the transferred entity as of the transaction date is deemed as FMV.


Valuation could be more complicated when the transferred company is in a predictable continous profitable status in the future yet with relatively small investment/equity value reflected in the financial statements. It depends on the further discusion with the local tax authority to agree on a most suitabe valuation method for individual cases.


FMV in future restructuring practice

For group reorganization, the set price would not always be in consistent with the  FMV in practice. Under such circumstance,  commercially the set price can still be used for necessary legal procedures such as company registration change and etc. while tax wise, the taxable basis might be reassesed as FMV recognized by Chinese tax authoity with deduction of the cost of equity investment. That does not require any bookkeeping adjustment in the financial statemets of the transferred company nor the transferee. The reasessed FMV would be recognized by the Chinese tax authority when the shares in the transferred Chinese company is disposed in the future by the transferee with the submission of the capital gains tax declaration documents filed for this time's group restructruring.



In many group reorganization cases, FMV assessment is the crucial issue which may lead to different tax burden at group level. To carefully select a reasonable approach for FMV assessment is highly recommended. A local appraisal report is not always required, yet, might be necessary in certain cases as reference of FMV.

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