China's Ministry of Finance and State Administration of Taxation have jointly issued Announcement No. 3 of 2022 on pilot tax policies for real estate investment trusts (REITs) in the infrastructure sector. This includes two main tax benefits.
The first provides that where infrastructure assets are contributed to a project company in exchange for shares (equity), the original tax base of the assets is used in determining the tax base of the assets for the project company and the tax base of the shares for the original owner of the assets. As such, no income is recognized, and no income tax is levied. This applies prior to the establishment stage of an infrastructure REIT.
The second provides that where an original owner of a project company transfers the shares (equity) in that company to an infrastructure REIT in exchange for units in the REIT in the establishment stage and realizes a value increase according to the asset transfer valuation, the income tax due on the increase may be deferred. The deferral is allowed until the REIT fundraising is complete and payment is made for the share (equity) transfer.
Announcement No. 3 of 2022 applies retroactively from 1 January 2021 for infrastructure REIT pilot projects organized and carried out by the China Securities Regulatory Commission and the National Development and Reform Commission.