Linklaters advises on the first batch of Perpetual Bonds offerings following publication of new PRC regulations

Linklaters recently advised on the first batch of offshore Senior Perpetual Bonds offerings since the publication of new PRC regulations in early 2019. The Ministry of Finance (MOF) has published the Notice of the Ministry of Finance on Issuing the Provisions on the Accounting Treatment of Perpetual Bonds (Accounting Treatment Notice) and the Announcement on the Issue of Corporate Income Tax Policy for Perpetual Bonds (Tax Treatment Announcement) (collectively as New Regulations) to clarify the accounting and tax treatment of Perpetual Bonds. Perpetual Bonds have become a popular funding tool for corporate issuers, especially State-owned enterprises, as Perpetual Bonds can be used to help reduce leverage as well.


There have always been different interpretations on whether Perpetual Bonds can be recognised as equity. With this in mind, MOF published the Accounting Treatment Notice in January 2019, which has further clarified the criteria in determining whether Perpetual Bonds should be treated as equity or liabilities for accounting purposes. According to the Accounting Treatment Notice, in classifying Perpetual Bonds, issuers shall make their assessment based on the Accounting Standards for Business Enterprises No. 37 Presentation of Financial Instruments (Cai Kuai [2017] No. 14) and by taking into consideration the ranking, interest rate step-up and permanency of the Perpetual Bonds. In April 2019, MOF and the State Taxation Administration co-issued the Tax Treatment Announcement, aiming to clarify the taxation treatment of Perpetual Bonds and ensure consistency between the tax treatment and accounting treatment. It is understood that the New Regulations do not require issuers to amend the accounting treatment of any existing Perpetual Bonds. The first batch of offshore Perpetual Bonds were offered as senior ranking obligations with interest rate step-ups of 300bps to 500bps and were classified as equity.


Linklaters has extensive experience in advising on Perpetual Bonds issuances. The first batch of Perpetual Bonds offerings since the publication of the New Regulations are useful references for future Perpetual Bonds offerings. But as the New Regulations have only been in effect since early 2019, it will take time for market consensus to develop. It is suggested that issuers consult with legal advisors as early as possible in relation to any proposed Perpetual Bonds offerings. If you would like to have further information on the New Regulations, please feel free to contact our Capital Markets team.


Linklaters has one of the largest China focused capital markets practices of any international law firm. Led by William Liu, the team includes partners Hwang Hwa Sim, Michael Ng, Terence Lau and Sherry Cui and counsel Hanwen Yu and Lipton Li, supported by a team of more than 20 capital markets lawyers.