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Policies to Help Companies Deleverage Unveiled

The State Council of China has recently issued an opinion document on proactively and prudently lowering the leverage ratio of domestic companies, demanding that the fiscal and taxation policies to support deleveraging be fully implemented and improved. Such policies, including those related to corporate mergers and restructuring, bankruptcy liquidation, asset securitisation, debt-for-equity swaps and the write-off of banks’ non-performing assets (NPAs), are expected to play an active role in lowering the debt levels of mainland enterprises.

The process of deleveraging affects various transaction segments. To spur market activities, the support of fiscal and taxation policies is required. According to Dai Bohua, Assistant Minister of the Ministry of Finance (MOF), the policies formulated by MOF cover three key areas.

The first one concerns the supporting policies for the disposal of NPAs involved in deleveraging and debt-for-equity swaps. NPA disposal is a major issue one must address in debt-for-equity swaps, according to Dai. It is now clear that creditor banks can transfer their creditors’ rights to various types of enforcement bodies provided that they do so in a market-oriented and rules-based manner, and that the scope of disposal is confined to those creditors’ rights intended for debt-for-equity swaps. While current policies allow credit banks to transfer NPAs in batches, the new policies go further to permit the transfer of creditors’ rights in the form single transaction so as to enhance operational efficiency of debt-for-equity swaps and achieve lower leverage.

Second, the MOF has devised relatively comprehensive preferential taxation policies to support corresponding transaction segments involved in the process of deleveraging and debt-for-equity swaps. 

For example, corporate restructurings that meet certain requirements may enjoy reductions or exemptions of relevant taxes, such as enterprise income tax, value-added tax, land appreciation tax and deed tax. For issues related to corporate bankruptcy and dissolution, it is now clear that the liquidation expenses of a bankrupt enterprise, as well as the salaries payable to its employees, are deductible prior to the payment of enterprise income tax. As regards the securitisation of corporate assets, it is stipulated that contracts of such activities shall be temporarily exempt from stamp duty. The bad debts of a bank are also deductible prior to the payment of enterprise income tax should they meet the criteria of “real losses”.

The third one concerns the better management of charges and funds. With regard to charges, the exemption of 18 types of administrative and institutional fees shall be extended from small and micro enterprises to all companies and individuals. Government funds shall be reviewed and reformed. While some like price regulation funds may no longer require contributions from enterprises, others like local education surcharges may have their applicable scope of reduction and exemption expanded, or levy rates adjusted. The levy rates of forest conservation funds, for example, will be lowered to zero. Government departments may not have the authority to directly abolish these funds since some of them are prescribed by relevant laws. Therefore, to effectively reduce companies’ burdens, the levy rates of these funds will be adjusted to zero where legally permissible. For charges and funds that remain in force after the reviews, it is crucial to keep the public informed in an open and transparent manner.

For details of the opinion document released by the State Council in Chinese, please see: http://www.gov.cn/zhengce/content/2016-10/10/content_5116835.htm

Content provided by Picture: HKTDC Research
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