Due diligence services in China.

Mergers & acquisitions deals may take the form of either;

1. The purchase of equity or assets of an existing company.
2. Share swaps
3. A merger of two or more business entities by way of cash or shares, or
4. A combination of (i), (ii) and (iii).

This would depend on many factors. For example, if a foreign investor already has a reliable business associate in China, the foreign investor may wish to consider entering into a merger with the existing entity. The advantages of a merger with a local counterpart are, among others, ready local knowledge and channels to penetrate the local market and the comfort of having one less competitor in the market while the existing business continues.

In some instances, the foreign investor may worry about the hidden liabilities in the target company. Under these circumstances, the foreign investor may be reluctant to enter into a merger with the target company but wish to purchase only the assets of the target company. Therefore, the foreign investor may form a separate entity and thereafter acquire the assets of the local company through the newly formed entity. An asset deal enables the foreign investor to acquire only the viable assets without having to take over the accumulated debts and liabilities of the local entity.

According to the Notice of the Ministry of Finance and the State Administration of Taxation on Enterprise Income Tax Treatment of Enterprise Reorganisation Caishui [2009] No.59, as a general proposition, the relevant tax treatments of merger are as follows:

1. The merging enterprise shall determine the tax basis of assets and liabilities received from the merged enterprise(s) in accordance with the fair market value.
2. The merged enterprise and its shareholders shall follow the enterprise income tax treatment of liquidation.
3. The tax losses of the merged enterprise shall not be carried over to or be utilised by the merging enterprise.