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May 23, 2019
China releases the corporate income tax treatment on perpetual bonds
China’s Ministry of Finance (MOF) and State Taxation Administration (STA) jointly released MOF/STA PN  No. 64 (PN 64)1 to clarify the corporate income tax (CIT) treatment on perpetual bonds. PN 64 becomes retroactively effective on 1 January 2019.
PN 64 defines perpetual bonds as renewable corporate bonds, renewable company bonds, perpetual debt financing instruments (including perpetual notes), and non-fixed-term capital bonds approved by the government authorities and issued according to the legal procedures.
The issuer can choose to apply the CIT treatment of stock or bonds on the perpetual bonds as discussed below. The CIT treatment is irrevocable once adopted and it should be disclosed in the issuance documents of the stock exchange, inter-bank bond market or other issuing markets.
If the CIT treatment of stock is adopted and both bond issuer (issuer) and the bond investor (investor) are Chinese resident enterprises, the investor will be exempt from CIT on dividends from perpetual bonds; whereas the issuer’s bond interest expense is not deductible for CIT purposes.
If the CIT treatment of bonds is opted, the investor’s interest income from the perpetual bonds will be subject to CIT and the issuer’s bond interest expense is deductible for CIT purposes. ]
To apply for the CIT treatment of bond interest, at least five of the following conditions must be met:
PN 64 provides the issuer an option to choose the tax treatment of bonds or stocks on the perpetual bonds. It is consistent with the recommendation in OECD’s2 final report on BEPS3 action plan for Hybrid Mismatch Arrangements. This reflects China’s positive attitude in responding to international anti-tax avoidance actions in its tax reform. Foreign investors may be allowed to invest in perpetual bonds through certain investment channels. It is recommended for the foreign investors to understand the specific China CIT treatment on the perpetual bond before making the investment in the market.
1. PN 64 was issued on 16 April 2019.
2. Organisation for Economic and Co-operation and Development.
3. Base Erosion and Profit Shifting.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Services Limited, Hong Kong
Ernst & Young (China) Advisory Limited, Shanghai
Ernst & Young (China) Advisory Limited, Beijing
Ernst & Young (China) Advisory Limited, Shenzhen
Ernst & Young LLP (United States), China Tax Desk, New York
Ernst & Young LLP (United States), China Tax Desk, Chicago
Ernst & Young LLP (United States), China Tax Desk, San Jose
Ernst & Young LLP (United Kingdom), China Tax Desk, London
Ernst & Young LLP (United States), Asia Pacific Business Group, New York