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Enterprises adopting debt-to-equity swaps will get new tax breaks to boost their strength, according to a circular published on Tuesday on the website of the State Administration of Taxation.
The policy support, experts said, confirmed the government's pledge to further stimulate the reform of the country's State-owned enterprises (SOEs) and relieve the country of heavy non-performing loan (NPL) burdens.
According to the circular, the new package of tax breaks mainly include the exemption of value-added tax and consumption tax for enterprises, which have been approved by the government to conduct debt-to-equity swaps.
The tax breaks would be understood as new kind of capital support by the government to intensify SOE reforms, according to Gao Huiqing, a senior economist with the State Information Centre.
China established four asset management companies (AMCs) - Huarong, Cinda, Orient and Great Wall - in 1999 to tackle the rising NPLs of the country's four major banks - the Industrial and Commercial Bank of China, Bank of China, the Agricultural Bank of China and China Construction Bank.
The four AMCs conducted a series of debt-to-equity swaps with around 580 SOEs, involving more than 400 billion yuan (US$48.3 billion) of debt.
Debt-to-equity swaps were aimed at helping debt-ridden large SOEs overcome their huge financial burdens.
The debts were transferred into equities which the AMCs controlled in the enterprises. Then, a new holding company would be set up, according to the contract of the debt-to-equity swap.
Since April 2000, participating SOEs have stopped paying interest on loans to banks, which is reportedly equivalent to an annual sum of 24 billion yuan (US$2.9 billion).
Specifically, according to the circular, enterprises, which transferred property assets as an investment to the new holding companies, will be free from value-added tax.
(China Daily February 24, 2005)
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