Foreign companies participating in mergers and acquisitions (M&A) of domestic companies will now receive a tax break.

The State Administration of Taxation recently issued a notice saying foreign companies, which hold more than 25 per cent of a domestic firm due to an M&A, will enjoy the same conditions as foreign-funded companies.

China has dual-track enterprise income tax policies for domestic and foreign-funded companies.

The income tax rate for domestic companies is 33 per cent, while that for foreign-funded companies is about 17 per cent.

Ni Hongri, a senior research fellow with the Development Research Center under the State Council, said the tax break is aimed at encouraging foreign investment in accordance with an earlier rule issued by the Ministry of Commerce.

In March, the ministry issued a temporary M&A rule between foreign and domestic companies.

It said domestic firms would be allowed to re-register as foreign-invested companies when overseas interests took a stake of at least 25 per cent through a merger or acquisition.

But domestic firms would be barred from selling their assets "significantly" cheaper than the price evaluated by domestic appraisal firms, it said.

Foreign firms must also adhere to China's existing industry policies, which bar them from buying majority stakes in key areas like banking, insurance, telecoms, retail, automobiles and energy, the rule said.

In recent years, M&As have become important ways of attracting foreign investment globally, said Zhang Peisen, a senior researcher with the Taxation Research Institute under the State Administration of Taxation.

"The tax break will encourage mergers and acquisitions in China," he said.

But in the long run, the dual-track enterprise income tax system should be unified, both Zhang and Ni agreed.

For years, tax experts and domestic entrepreneurs have called for a unified income tax scheme for domestic and foreign-funded companies.

(China Daily June 13, 2003)