1、NavigatingChinasNewCompanyLaw:AGuideforForeignInvestorsTheNewCompanyLawinChina:AnOverviewConsiderationsforForeignStakeholdersandFIEsTaxImplicationsUndertheNewCompanyLawPg04Pg10Pg20Issue203April2024|www.china-FromDezanShira&AssociatesChinaBriefingIssue203April
2、20242IntroductionCreditsPublisher-AsiaBriefingMediaLtd.LeadEditor-MelissaCyrillEditor-QianZhouDesigner-AparajitaZadooThesixthrevisionofChinasCompanyLawrepresentsthemostextensiveamendmentinitshistory.Fromstrictercapitalinjectionrulestoenhancedcorporategovernance,thecha
3、ngesintroducedintheNewCompanyLawhavefar-reachingimplicationsforbusinesses,includingforeigninvestedenterprises(FIEs)operatinginorenteringtheChinamarket.SinceJanuary1,2020,theCompanyLawhasgovernedbothwhollyforeign-ownedenterprises(WFOEs)andjointventures(JVs),followingt
4、heenactmentoftheForeignInvestmentLaw(FIL).MostFIEsmustalignwiththeprovisionsoftheNewCompanyLawfromJuly1,2024,whilethoseestablishedbeforeJanuary1,2020havebitmoretimeforadjustmentsduetothefive-yeargraceperiodprovidedbytheFIL.Thefinaldeadlinefortheiralignme
5、ntisDecember31,2024.FIEsareadvisedtothoroughlyunderstandtheprovisionsoftheNewCompanyLawinhowitwillaffectthem,andinitiatenecessaryadjustmentstoensurecomplianceandoptimizestrategicplanning.Itiscrucialthatcompaniescommencepreemptiveassessmentsandactionsearlyon,
6、recognizingthatseveralaspectsmayentaillengthyprocesses,includingreportingtooverseasheadquarters,seekingboard-levelapprovals,adjustingagreements,andnegotiatingwithdomesticpartners(inthecaseofJVs).Inthispublication,weguideforeigninvestorsthroughtheimplicationsoftheNew
7、CompanyLawforexistingandnewFIEsandrelevantstakeholders.Webeginwithanoverviewoftherevisionsbackgroundandobjectives,followedbyasummaryofkeychanges.Ourin-depthanalysis,fromaforeignstakeholderperspective,illuminatesthepracticalimplications.Lastly,weexploretaximpacts
8、alongsidetherevisions,demonstratinghowtheNewCompanyLawmayshapefuturebusinesstransactionsandarrangements.WetrustthatthispublicationwillaidyouinbetterpreparingfortheNewCompanyLaw.ALBERTOVETTORETTIPartnerDezanShira&AssociatesWithkindregards,AlbertoVwww.india-www.vietna
9、m-www.china-ChinaBriefingIssue203April20243AsiaBriefingLtd.Unit507,5/F,ChinachemGoldenPlaza,77ModyRoad,TsimShaTsuiEastKowloon,HongKong.AnnualSubscriptionChinaBriefingMagazineispublishedfourtimesayear.Tosubscribe,pleasevisitpleaseexploretheclickableresourcesbelow.Co
10、ntentsTheNewCompanyLawinChina:AnOverviewPg04ConsiderationsforForeignStakeholdersandFIEsPg10TaxImplicationsUndertheNewCompanyLawPg20ReferenceChinaBriefingandrelatedtitlesareproducedbyAsiaBriefingLtd.,awhollyownedsubsidiaryofDezanShiraGroup.Contentisprovidedby
11、DezanShira&Associates.Noliabilitymaybeacceptedforanyofthecontentsofthispublication.Readersarestronglyadvisedtoseekprofessionaladvicewhenactivelylookingtoimplementsuggestionsmadewithinthispublication.Forqueriesregardingthecontentofthismagazine,pleasecontact:Allm
12、aterialsandcontents2024AsiaBriefingLtd.LikeChinaBriefingonFacebookFollowChinaBriefingonTwitterConnectwithDezanShira&AssociatesonLinkedinViewDezanShira&AssociatesonYoutubeFollowUsScantheQRcodetofollowusonWeChatandgainaccesstothelatestinvestornewsandresources
13、Connectwithusforthelatestnews,eventsandinsightsacrossAsia.Legal,Tax,AccountingNewswww.china-andWSAdvisoryandCNavigatingChinasNewCompanyLaw:AGuideforForeignInvestorsChinaBriefingIssue203April20244TheNewCompanyLawinChina:AnOverviewOnDecember29,2023,theStanding
14、CommitteeoftheNationalPeoplesCongress(NPC)adoptedanamendmenttotheCompanyLaw(“NewCompanyLaw”).ThefinalversionoftheNewCompanyLaw,whichwillcomeintoforceonJuly1,2024,followsmanyyearsofdraftamendmentsanddeliberations,beginningin2019.TheNewCompanyLawrepresentsacom
15、prehensiveoverhaulofChinasexistingCompanyLaw,addressingvariousaspectsofcorporategovernance.Theseincludethecapitalcontributionsystem,companyorganizationalstructure,shareholderprotection,directorobligations,andcorporateregistrationandliquidationsystems,amongothers.Asafundam
16、entallegalframeworkinshapingcorporatebehavior,protectingshareholderinterests,andpromotingresponsiblebusinessconductinChina,itsimpactextendsbeyondlegalcompliance,significantlyinfluencingbusinesspracticesandmarketdynamics.CompaniesthatarealreadyestablishedinChinaorare
17、seekingtoentertheChinasNewCompanyLawaimstocreateamorerobustlegalframeworkforbusinessesoperatinginChina.ForeigninvestedenterpriseoperatinginorenteringtheChinamarketshouldpaycloseattentiontothemajorrevisionsincorporategovernanceandcapitalinjectionrules,among
18、others.Chapter1Chinesemarketmustfamiliarizethemselveswiththelatestchanges.Inthisarticle,wediscussmajorchangesintroducedbyChinasNewCompanyLaw,exploretheprevailingcorporategovernancetrends,andunderscorewhythesedevelopmentsmattertoforeigninvestors.Background:Whyamend
19、UnderstandingthecontextbehindtherevisionwillenablebusinessestogaindeeperinsightsintothechangesoutlinedintheNewCompanyLawanddiscernthetrajectoryandprevailingtrendsinChinascorporategovernancelandscape.Sinceitsenactmentin1993,ChinasCompanyLawhasundergonetwocom
20、prehensiverevisionsandfouramendmentsinthepast30years.Theimplementationofthe2018CompanyLawsawseveralpracticalconcernsthatneededtobeaddressed:QianZhouManager,ChinaBriefingAuthorChinaBriefingIssue203April20245Theregisteredcapitalsubscriptionsystem:Althoughthissyst
21、emloweredthethresholdforcompanyregistration,encouragingentrepreneurshipandemployment,italsobroughtforthsomeproblems.Somecompaniescouldinflatetheirregisteredcapital,leadingtoinsufficientactualinvestmentcapacity,whichaffectedcompanyoperationsandtherightsofcreditors.Non
22、-standardizedcorporategovernancestructure:Insomecompanies,thefunctioningofshareholdermeetings,boardsofdirectors,andsupervisoryboardslackedproperstandardization,resultinginlowdecision-makingefficiency.Instancesofinternalcontrollapsesbycertainindividualswerealsorecorded.A
23、dditionally,shareholderrightsprotectionwasfoundtobeinadequate,potentiallycompromisingshareholderinterests.Issueswithequitytransferanddebtdisposal:Duringequitytransfers,disputesoftenaroseamongshareholders,andtheexerciseofpreemptivepurchaserightswasfoundtobeinappropria
24、te.Regardingdebtdisposal,somecompaniesincreasedcapitalthroughdebt-to-equityswaps,buttherewerealsoinstancesofdivertingfundsthroughconvertiblebonds,harmingboththecompanyandcreditors.Challengesinlegalandregulatoryalignment:TheimplementationoftheCompanyLawalongsideothe
25、rlegalstipulationsposedchallengesduetoinconsistenciesbetweenrespectivetaxlaws,intellectualpropertyregulations,andtheCompanyLaw.Toaddresstheseconcernsandalignwithsocialandeconomicdevelopmentgoals,thesixthrevisionoftheCompanyLawwasinitiatedin2019.Afterundergoingf
26、ourroundsofdeliberationandmultipledraftamendments,itwasultimatelyenactedonDecember29,2023.Thelengthyanditerativeprocessunderscoresitsprofoundsignificance.Infact,thisparticularrevisionstandsoutasthemostextensiveinthehistoryofamendmentstoChinasCompanyLaw.Timeline
27、ofChinasCompanyLawAmendmentsYearNatureContent1999AmendmentModifiedrulestoimplementstate-ownedenterprisereforms.2004AmendmentAdjustedtofacilitatethemarketizationofshareissuancebycompanies.2005ComprehensiveRevisionEncouragedinvestmentinestablishingcompaniesandrelaxedcapital
28、controls.2013AmendmentFurthereasedcapitalcontrolsinalignmentwithcompanyregistrationsystemreforms.2018AmendmentModifiedsharesrepurchaseregulationstoalignwitheffectivecapitalmarkets.2023ComprehensiveRevisionModifiedcapitalinjectionrules,companyorganizationalstructure,sharehol
29、derrights,andothercorporategovernanceissues.ChinaBriefingIssue203April20246WhyitmatterstonewandexistingFIEoperationsSinceJanuary1,2020,theForeignInvestmentLaw(FIL)hasbecomeaguidingdocumentgoverningforeigninvestment.AstheFILcameintoeffect,Article42oftheFILsimu
30、ltaneouslyrepealedtheLawonWhollyForeign-ownedEnterprises(WFOELaw),theLawonSino-foreignCooperativeJointVentures(CJVLaw),andtheLawonSino-foreignEquityJointVentures(EJVLaw).Further,Article31oftheFILstipulatesthattheorganizationalform,governingstructure,andoperatingrul
31、esofforeigninvestedenterprises(FIEs)mustadheretoprovisionsoftheCompanyLaw,thePartnershipEnterpriseLaw,andotherapplicablelaws,likethetreatmentofenterprisesestablishedbydomesticinvestors.Thatistosay,theCompanyLawisthegoverninglawformostforeigninvestedenterprises(
32、FIEs),consideringthatthelimitedliabilitycompany(LLC)isthepredominantorganizationalstructurechosenbyamajorityofFIEs,accordingtothelatestdatafromtheMinistryofCommerce.Giventhefive-yeargraceperiodundertheFILduringwhichFIEsestablishedbeforeJanuary1,2020,canretainth
33、eiroriginalorganizationalstructurestheapplicationoftheNewCompanyLawonFIEscanbedividedintotwoscenarios:FIEsthatwereestablishedafterJanuary1,2020,orthoseestablishedbeforeJanuary1,2020,butalreadyadjustedtotheCompanyLaw,mustadheretotheprovisionsoftheNewCompanyL
34、awfromJuly1,2024.ForFIEsthatwereestablishedbeforeJanuary1,2020,andhaventyetadjustedtotheCompanyLaw,thefive-yeargraceperiodwillendonDecember31,2024.ThismeansthattheywillneedtoadheretotheprovisionsoftheNewCompanyLawfromJanuary1,2025.Ineitherscenario,foreign
35、investorsshouldthoroughlyreviewtheprovisionsoftheNewCompanyLawandlaunchtheadjustmentprocessasearlyaspossible.Thisisparticularlycrucialduetothetimerequiredforreportingtooverseasheadquartersandnegotiatingwithdomesticpartners(inthecaseofJVs).Whenneeded,seeking
36、professionalassistanceisadvised,especiallyforforeignpartieswhomaybeunfamiliarwithChinascorporategovernanceframework.OverviewofthechangesThesixthrevisionoftheCompanyLaw(“thesixthrevision”)representsasignificantadvancementoveritspredecessor,incorporatingvariousimprov
37、ementsacrossseveralfronts.BycontextualizingChinasuniquecircumstances,FirstdeliberationDecember21,2021SeconddeliberationDecember27,2022ThirddeliberationAugust28,2023FourthdeliberationDecember29,2023ProcessoftheSixthCompanyLawRevision2341ChinaBriefingIssue203April20247Ke
38、yChangesinChinasNewCompanyLaw*AreaChangesNewchapteroncompanyregistrationArticle32:Clarifiescompanyregistrationmatters.Article34:ClarifiesthatthesixregistrationitemslistedinArticle32,ifnotregisteredornotupdated,shallnotbeusedagainstbonafidecounterparties.Capitalc
39、ontributionrulesArticle47:LimitsthemaximumperiodforcapitalcontributionbyshareholdersofLLCstofiveyears.Articles48:Addsthatshareholdermaymakecapitalcontributionsinstockrightsandcreditorsrights.Articles50:Addsthatwhereanyshareholderfailstomakeactualcapitalcontrib
40、utionsasprescribed,shareholdersatthetimeoftheestablishmentshallbearjointliabilitytotheextentoftheinsufficientcapitalcontributions.Article52:Addsthatifashareholderfailstopaythecapitalcontributionwithintheprescribedtimeandsubsequentgraceperiodaftertheestablish
41、mentofanLLC,thentheycanlosetheequityoftheunpaidcapitalcontribution.Article54:RequiresaccelerationofshareholdercapitalcontributionwhenanLLCisunabletorepaymaturingdebts.Article88:Addsthatthetransferorandtransfereeinequitytransferbearjointliabilityfortheinsuff
42、icientcapitalcontribution.ProfitdistributionArticle54:Shortensthetimelimitforcompletingcompanyprofitdistributionfromoneyearfromthedateofthedistributionagreementtosixmonths.Article214:CancelstheprohibitionofusingcapitalreservefundstomakeupforcompanylossesCapita
43、lreductionArticles224:Clarifiesthatproportionalreductionappliesbydefaultincapitalreduction,unlessitisotherwisestipulatedinlegalprovisions,thearticlesofassociation,orunanimouslyagreedbyallshareholders.Articles225:Allowscompaniestooffsetlossesbyreducingregisteredcap
44、italwithoutactualcapitalwithdrawalbyshareholders.Article226:Specifieslegalconsequencesforillegalcapitalreduction.CompanyorganizationalstructureArticle69:AllowscompaniestoestablishanauditcommitteeinsteadofaboardofsupervisorsArticle83:SmallLLCscan,withunanimousshareh
45、olderconsent,optnottohavesupervisors.Article71:Specifiesdirectorremovalprocedures.Articles59:Introduces“delegatedauthority”totheboardofdirectors,allowingtransferofsomedecision-makingpower(e.g.,makingaresolutionontheissuanceofcorporatebonds)fromshareholderstotheboard.A
46、rticles66:Clarifiesthevotingrulesoftheboardofshareholders.Article68:Requirescompanieshaving300ormoreemployeesshouldincludeemployeesrepresentativesintheboardofdirectorsunlessboardofsupervisorshasbeenestablishedandincludesemployeesrepresentatives.ChinaBriefingIssu
47、e203April20248KeyChangesinChinasNewCompanyLaw*AreaChangesLegalrepresentativeArticle10:Expandsthescopeoflegalrepresentativestoincludealldirectorsormanagersexecutingcompanyaffairs.Articles10and35:Clarifiesrulesforchanginglegalrepresentatives.Decision-makingrulesArti
48、cle26:Enhancesthetimelimitforexercisingtherighttorevokeresolutionsinlawsuits.Article27:Introducesrulesforresolutionsthatarenotestablished,inadditiontoinvalidorrevocableresolutions.ShareholderrightsArticles57and110:Strengthensshareholderinformationrights,allowingac
49、cesstoaccountingrecordsandrelatedmaterials.Article189:Allowsshareholderstosuetheseniormanagement*ofwhollyownedsubsidiaries.Article23:Establishesa“horizontaldisregardofcorporatepersonality”systemforcompaniescontrolledbythesameshareholder.Article86:Clarifiesthatthetimi
50、ngofequitychangesisdeterminedbytheentryintheshareholderregister.Article89:Enhancesdissentingshareholdersbuybackrights.Regulationofcontrollingshareholders,actualcontrollers,andseniormanagementCapitalmaintenanceresponsibility:Article51:Addsthatdirectorsmustdemandcapital
51、paymentfromshareholderswhofailtocontribute.Non-compliantdirectorsareliableforcompensation.Article53:Addsthatseniormanagement*arejointlyliablewithshareholderswhodivertcapitalaftercompanyestablishment.Articles163,211,and226:Specifyseniormanagementsresponsibilityforilleg
52、alfinancialassistance,profitdistribution,andcapitalreduction.Article180:Clarifiescontrollingshareholderoractualcontrollerwhoexecutecompanyaffairswithoutbeingformaldirectorsalsoassumefiduciaryanddiligenceduties.Definesfiduciaryanddiligenceduties,addressingpotentialconfl
53、ictsofinterest.Article192:Clarifiesthatcontrollingshareholdersoractualcontrollerassumejointliabilitieswheretheyinstructadirectororseniormanagertoengageinactsthatharmtheinterestsofthecompanyorshareholders.Articles182and185:Strengthenrulesonrelated-partytransact
54、ions.Article191:Introducesdirectorsliabilitytothirdparties.Article193:Allowscompaniestopurchasedirectorliabilityinsurance.CompanyliquidationsystemArticle230:Addsa“recoveryrule”forvoluntarydissolution.Article232:Clarifiestheliquidationobligationofdirectors.Articles240and
55、241:Introducesimplifieddissolutionandmandatorydissolutionprocedures.*Keychangesinthistablepertainspecificallytolimitedliabilitycompaniesduetospaceconstraintsandthepublicationsintendedpurpose.*Seniormanagementinthetablereferstodirectors,supervisors,andexecutives.China
56、BriefingIssue203April20249thisrevisionintegratesinvaluableinsightsgleanedfromyearsofjudicialpractice.Notably,numerousprovisionswithintheupdatedframeworkdrawinspirationfrompriorjudicialinterpretations,particularlyinareasconcerningcompanydisputeresolution.Additionally,p
57、racticalexperiencesfromthemarketsuchasinnovationincapitalreductionandtheinclusionandenhancementofbondmanagementsystemshavesignificantlyshapedtherevisedcontent.Ontheotherhand,thesixthrevisionalsolooksbeyondnationalborders,absorbingbeneficialelementsfromrelevantsy
58、stemsinothercountriesandregions.ThisapproachaimstofurtheroptimizetheChinabusinessenvironmentandensurealignmentwithinternationalstandards,therebypromotingsustainedandhealthymarketdevelopment.Furthermore,thesixthrevisiondemonstratescarefulcoordinationwithotherlegaldo
59、mains.Forinstance,theNewCompanyLawalignswithprovisionsintheCivilCodeandSecuritiesLaw.Theseeffortscollectivelycontributetoacomprehensiveandforward-lookinglegalframeworkforcompaniesinChina.TheNewCompanyLawhasremoved16articlesfromthe2018versionandaddedormodifi
60、ed228articles,witharound112substantialchanges.Amongothers,themostsignificantchangesintheNewCompanyLawaretwofold:Capitalsystemreform:Theprincipleofcapitaladequacynowpermeatestheentirelifecycleofacompany.Corporategovernancereform:Theshiftfromshareholder-centricgove
61、rnancetoboard-centricgovernance.Inaddition,theNewCompanyLawrespectsandencouragesrationalautonomywithincompanies,whilealsoprovidingsufficientlegalremediesforcompanycreditorsandshareholders.Tobemorespecific,keychangesoftheNewCompanyLawaresummarizedinthetablebelow
62、.CORPORATEESTABLISHMENTANDGOVERNANCEDezanShira&AssociatescanadviseonthelegalincorporationofyourinvestmentacrossmultipleAsiancountries.Thisimportantlegalprocess,whencombinedwithourtaxplanningservices,providesyourbusinesswithasuperiorandintegratedcorporateestablishme
63、ntprocessunderoneserviceprovider.Formoreinformationaboutourservice,pleasecontact.EXPLOREMORERELATEDREADINGChinaIssuesRulesonTransitionPeriodforComplyingwithNewRegisteredCapitalRulesChinaBriefingArticleInordertoaccommodatecompaniesthatareestablishedbeforetheamen
64、dedCompanyLawcomesintoeffectandhavesubscribedcapitalpaymenttermsexceedingthefive-yeartimelimit,athree-yeartransitionalperiodwillbeimplemented.Duringthisperiod,thesecompanieswillberequiredtograduallyadjustthecontributionperiodtomeetthisrequirement.Inthisarticle
65、,weintroducethedetailslistedinthedraftversionoftheProvisionsontheRegisteredCapitalRegistrationManagementSystem.READMOREChinaBriefingIssue203April202410ConsiderationsforForeignStakeholdersandFIEsDespiterecenteconomicchallenges,manyorganizationsChinaoperationsprovi
66、deunparalleledaccesstooneoftheworldslargestandmostcompetitiveglobalsupplychains.Overthepast30years,asignificantnumberofforeigninvestedenterprises(FIEs)havebeenestablishedinChina.Asoftheendof2022,thenumberofFIEsoperatinginChinahadexceeded1.12million.Compared
67、totheirdomesticcounterparts,FIEsdemonstrategreatercautionregardinglegalrevisionsandarediligentinmakingswiftadjustments.ThisstemsnotonlyfromthecloserscrutinyFIEsfacefromregulatoryauthoritiesbutalsofromtheircommitmenttocomplianceandmaintainingacompetitiveedge.T
68、heNewCompanyLaw,asafundamentalregulationoverseeingcorporategovernanceinChina,introducessignificantchangestothelegallandscapeforFIEs.Inthisarticle,wesummarizekeyissuesthatforeigninvestorsshouldpayattentiontointheNewCompanyLaw,exploretheirpotentialimpact,Chapter
69、2andproposepreliminarystrategiesthatcanbeadopted1.NewcapitalrulesandshareholdersobligationsArticle47ofthe2023CompanyLawstipulatesthatshareholdersofaLimitedLiabilityCompany(LLC)mustpaytheirsubscribedcapitalinfullwithinfiveyearsofthecompanysestablishment.Thischa
70、ngehasbeenintroducedtotackleissueswithshareholdersover-subscribingcapitalattheinitialstage,aswellasverylongpaymentterms,whichhassometimesresultedinthesubscribedcapitalneverbeingpaidinfull.Inadditiontothefive-yearcontributionterm,theNewCompanyLawcomprehensive
71、lystrengthensthesupervisionofshareholderscapitalcontributions.ItintroducesprovisionsTheNewCompanyLawbringssubstantialchangeswithimplicationsfornewandexistingforeigninvestedenterprisesandstakeholders.Foreigninvestorsmustassessifadjustmentstoexistingstructuresornew
72、businessnegotiationsarenecessary.QianZhouManager,ChinaBriefingAuthor1Thechangesdiscussedinthisarticlepertainspecificallytolimitedliabilitycompanies,asjoint-stockcompaniesconstituteonly0.3percentofFIEs,accordingtorecent2023datafromtheMinistryofCommerce.ChinaBriefing
73、Issue203April202411relatedtoliabilityofshareholdersfordefectivecapitalcontributions,acceleratedcapitalmaturity,supplementarycapitalcontributionobligationbyothershareholdersattheestablishmentofthecompany,andthelossofequityrightsforunpaidcapitalcontributions.Clearly,
74、therehasbeenashiftinChinascorporateregulationsfrommerelyencouraginganincreaseinthenumberofcompaniestofocusingonattractingmatureenterprisesandhigherqualityinvestments.Whilethetransitionfromabroadapproachtoamorerefinedonemaycauseshort-termchallenges,itultimat
75、elybenefitsthecompanyslong-termdevelopment.Byreturningtotheoriginalintentofsettingregisteredcapital,itnotonlyprotectstheinterestsofcreditorsbutalsoshieldsshareholdersfromoperationalrisksofthecompany.ChangestotheCapitalContributionRuleintheNewCompanyLawChanges
76、DescriptionLegalbasisFive-yearlimitforthetermofcapitalcontributionThemaximumperiodforcapitalcontributionbyshareholdersofLLCsislimitedtofiveyears,withexistingcompaniessubjecttotransitionalarrangements.Article47and266Shareholderliabilityforlossescausedbyinsuffici
77、entordefectivecapitalcontributionWhereanyshareholderfailstomakeactualcapitalcontributionsasprescribed,heshallbeliableforcompensationforthelossesitcausestothecompanyArticle49JointcapitalcontributionliabilityofothershareholdersatthetimeoftheestablishmentWhere
78、anyshareholderfailstomakeactualcapitalcontributionsasprescribed,shareholdersatthetimeoftheestablishmentshallbearjointliabilitytotheextentoftheinsufficientcapitalcontributions.Article50LossofequityrightsforunpaidcapitalcontributionIfashareholderfailstopaythe
79、capitalcontributionwithintheprescribedtimeandsubsequentgraceperiodaftertheestablishmentofanLLC,thentheycanlosetheequityoftheunpaidcapitalcontribution.Article51and52ShareholderliabilityforlossescausedbyillicitcapitalwithdrawShareholderswhoillicitlywithdrawthec
80、apitalcontributionsshallbeliableforcompensationforlossesitcausestothecompany.Article53AccelerationofcapitalcontributionAccelerationofshareholdercapitalcontributionshallapplywhenanLLCisunabletorepaymaturingdebts.Article54Jointcapitalcontributionliabilitybetweeneq
81、uitytransferorandequitytransfereeThetransferorandtransfereeinequitytransferbearjointliabilityfortheinsufficientcapitalcontributionwithlimitedexceptions.Article88ChinaBriefingIssue203April202412AdjustmentsThatExistingCompaniesNeedtoMaketoAdapttotheNewCapitalRu
82、leTypeWhocanapplyWhattoAdjustNoadjustmentneededExistingcompanieswhoseremainingcontributionperiodforitsshareholdersislessthanfiveyears,countingfromJuly1,2027Noneedtoadjustthetermofcontribution.VoluntaryadjustmentExistingcompanieswhoseremainingcontributionperiodf
83、oritsshareholdersexceedsfiveyearscountingfromJuly1,2027Thecontributiontermmustbeadjustedduringthetransitionperiod.TheadjustedcontributionperiodcannotexceedfiveyearsfromJuly1,2027,i.e.,thedeadlineforthecontributionpaymentmustbebeforeJune30,2032.Mandatoryadjustm
84、entCompanieshavingacontributionperiodexceeding30yearsortotalsubscribedcontributionsexceedingRMB10billion(US$1.4billion),andbasedontheofficialassessment,therearesignificantanomaliesinthecontributionperiodoramountofsubscribedcapitalThecompanymayberequiredtoadjus
85、tthecontributionperiodandamountwithinsixmonthsofthegovernmentdecision.TheadjustedcontributionperiodcannotexceedfiveyearsfromJuly1,2027,i.e.,thedeadlineforthecontributionpaymentmustbebeforeJune30,2032.ImplicationsforexistingFIEsInChinasforeigninvestmentlandscape
86、,whilemostFIEsexercisecommercialprudenceindeterminingregisteredcapitalfactoringincapitalexpenditures,operationalcosts,andsettingasidesurplusfundssomeoptforhigherregisteredcapitallevelstoavoidfuturecapitalincreaseprocedures.Thistypicallyinvolveslengthydocumentsigning
87、andregistrationchanges,lasting1-2months.Jointventures(JVs)oftenimposestricterpaymentdeadlinesforregisteredcapitalintheirarticlesofassociationtoensurebothpartiessimultaneouscontributionsalignwithoperationalneeds.Conversely,whollyforeign-ownedenterprises(WFOEs)tendtofav
88、orflexibilityinpaymentdeadlines,oftenallowingfullpaymentbeforethecompanysoperationalperiodexpires.Giventhesecircumstances,despitethegenerallystrongercapitaladequacyamongforeigncompaniescomparedtodomesticentities,manyFIEscouldbeaffectedbythenewcapitalcontributionr
89、ules.AsperthedraftversionoftheProvisionsontheRegisteredCapitalRegistrationManagementSystem(draftprovisions),existingcompaniesinChinawillbegrantedathree-yeartransitionperiodtocomplywiththenewrulesonregisteredcapital.Ifadoptedasis,thistransitionperiodwillspanf
90、romJuly1,2024,toJune30,2027.Underthedraftprovisions,existingFIEsmustadjusttheirsubscribedcapitalpaymentterms(contributionperiod)accordingtotherulesoutlinedinthetablebelow:Alternately,existingFIEshavetheoptiontodecreasetheirregisteredcapitalduringthetransitionperi
91、od,therebylesseningshareholderscontributionobligations.IfthereductioninregisteredcapitalChinaBriefingIssue203April202413doesntaffecttheactualpaid-incapital,asimplerprocessmayapply.ThisprocessinvolvespubliclyannouncingthereductionthroughtheNationalEnterpriseCreditI
92、nformationPublicitySystemfora20-dayperiod,subjecttomeetingspecificconditions.Moreover,FIEscanopttotransferaportionoftheirequityandbringinnewshareholders.Thisoptionbecomespertinentifexistingshareholdersencounterdifficultiesinpayingthesubscribedcapitalwithinther
93、evisedcontributionperiod,yettheyprefernottodecreasetheregisteredcapitalduetovariousreasons.However,inpractice,foreigninvestorsmaynotbasetheirequitytransferdecisionssolelyonthenewcapitalrequirements.BothWFOEsandJVsexercisecautionwhenconsideringnewpartners,taking
94、intoaccountvariousfactorsbeyondthecapitalregulations.ImplicationsfornewforeigninvestmentInlightoftheheightenedemphasisandscrutinyonshareholderscapitalcontributionobligations,newforeigninvestorsmustexerciseheightenedcautionwhendecidingontheirinitialregisteredcapita
95、l.Ontheonehand,theymustensureadequatereservecapitaltomeetongoingoperationalrequirements.Ontheotherhand,theyshouldavoidsettingexcessivelyhighregisteredcapitalamountstopreventsurplusandmitigatetheriskofbeingunabletofulfillcapitalobligations.Iffundingneedsareun
96、certain,foreigninvestorscanaddressthemthroughfuturecapitalincreases.Giventhejointliabilitysharedbyshareholderswhohaventfullypaidtheirsubscribedcapitalwithinthespecifiedperiodandothershareholdersatthetimeofestablishment,itsvitalforforeigninvestorstoestablisheff
97、ectivemechanismsinjointventurecontracts,shareholderagreements,andarticlesofassociation.Thesemechanismsensurethatallshareholderssynchronizetheircapitalcontributionsandpreventcompliantshareholdersfrombeingimplicatedbydefaultingones.Intermsofmergersandacquisitions(M&A),
98、thejointliabilityassociatedwithinsufficientcapitalcontributionbornebythetransferorandtransfereemeansthatforeigninvestorssellingtheirunpaid-inequitycannolongersimplytransferthecapitalcontributionobligationtothebuyer.Similarly,foreigninvestorbuyersmustcarefullyass
99、esstheactualpaymentstatusofthetargetcompanysregisteredcapital.Thisdiligencegoesbeyondensuringcompliancewiththearticlesofassociationandshouldinvolverequestingthecounterpartytocompletepaymentofanyoutstandingportionofregisteredcapitalbeforefinalizingthetransactio
100、n.ChangestothecorporategovernancestructureTheNewCompanyLawintroducessignificantadjustmentstotheregulationofcorporategovernancestructures.SpecificallyforLLCs,itoffersshareholdersconsiderableflexibilityinselectingthecompanysgovernanceframework.Supervisor(s)Oneofthemajo
101、rchangesintheNewCompanyLawistheprovisiontoallowLLCstoestablishan“auditcommittee”withintheboardofdirectors,inwhichcaseitwouldnotneedtoestablishaboardofsupervisors(orappointanysupervisors).Theauditcommitteecanbe“composedofdirectorsontheboardofdirectorsand
102、exercisethepowersoftheboardofsupervisors”.Meanwhile,Article83specifiesthatsmall-scaleLLCsorthosewithalimitednumberofshareholderscanappointasinglesupervisor.Andwithunanimousshareholderconsent,theycanforgoappointingasupervisoraltogether.ChinaBriefingIssue203Apri
103、l202414Toputitsimply,anLLCcanforgoestablishingaboardofsupervisorsorappointingindividualsupervisorsifiteithercreatesanauditcommitteewithinitsboardofdirectorsorgainsunanimousconsentfromitsshareholders.Thatsaid,shouldanFIEeliminatetheboardofsupervisorsorindi
104、vidualsupervisorscompletelyOvertime,supervisorshavebeentaskedwithoverseeingboththeboardofdirectorsandexecutivemanagement.However,theirrolecanbecomelargelyceremonialastheirappointmentandfundingareoftencontrolledbymajorshareholders.ForWFOEs,supervisorappointmentsmay
105、primarilyserveregistrationrequirementswithoutsubstantialsupervisoryresponsibilities.WhiletheauthorityofsupervisorsremainslargelyunchangedundertheNewCompanyLaw,theirdutiesandresponsibilitieshavesignificantlyincreased(moredetailsinthelatersections).Eliminatingsupervisor
106、smayalignbetterwiththeneedsofmostWFOEs.However,forJVsthecaseisdifferent.SincetheappointmentofsupervisorsoftenfacilitatesJVpartnersincontrollingthecompanyandsafeguardingtheirinterests,itslesslikelythatJVswillentirelyeliminatesupervisors.Nevertheless,thereisanot
107、herissuethatforeigninvestorsshouldpayattentionto.UndertheexistingCompanyLaw,smallLLCshavetheoptiontoappointonetotwosupervisorsinsteadofestablishingaboardofdirectors.InthecaseofJVs,itscommonforpracticalconsiderationstoleadtotheappointmentoftwosupervisors,w
108、itheachside(Chineseandforeignshareholders)appointingonesupervisor.However,Article83oftheNewCompanyLawexplicitlyeliminatestheoptionofhavingtwosupervisors.Consequently,existingJVsmayneedfurtherclarificationonwhethertheycanretainthetwo-supervisorstructurewithoutestab
109、lishingaboardofdirectors.IfsuchJVsareobligatedtostrictlyadheretotheprovisionsoftheNewCompanyLawandopttosetupaboardofsupervisors,theymayneedtoappointatleastfoursupervisorstomaintaintheprincipleofparity,witheachsideappointingtwosupervisors.Thiswouldadd
110、complexityandincreasepersonnelcoststothegovernancestructure.Then,shouldFIEsreplacethesupervisor(s)withanauditcommitteeOuranswerisnegativewerecommendFIEsrefrainfromsettingupanauditcommitteeforthemoment.TheprimaryreasonisthattheNewCompanyLawlacksclearprovision
111、sregardingtheauditcommitteesdeliberationmethodsandvotingprocedures.Withoutwell-definedmechanismsandpracticalexperience,achievinginternalcoordinationbetweentheexecutivefunctionsoftheboardofdirectorsandthesupervisoryroleoftheauditcommitteemayposesignificantchalleng
112、es.Consequently,theauditcommitteemightstillstruggletofullyfulfillitssupervisoryfunction.Finally,canFIEsopttoneitherestablishanauditcommitteenorappointsupervisor(s)AlthoughtheNewCompanyLawdoesnotexplicitlydefine“small-scaleLLCs”or“LLCswithalimitednumberofsharehol
113、ders”,FIEsshouldmeettheconditions,consideringthattheyaretypicallywhollyownedcompaniesorJVsestablishedbyfewshareholders.Dependingonthefuturepracticesofcompanyregistrationauthorities,webelieveitisfeasibleforFIEstoneitherestablishasupervisoryboardnorsetupanaudi
114、tcommitteeundertheboardofdirectors.ChinaBriefingIssue203April202415EmployeedirectorsAnothersignificantchangeincorporategovernanceisthattheNewCompanyLawstrengthensdemocraticmanagementofthecompanyandadjuststherequirementsforappointingemployeedirectors.Incontrastt
115、otheexistingCompanyLaw,whichrequiresonlycompanieswithState-ownedcapitaltohaveemployeedirectors,theNewCompanyLawmandatesthatLLCswithmorethan300employeesmustincludeemployeerepresentativesontheirboardofdirectors,unlessthecompanyhasalreadyestablishedaboardofsup
116、ervisorsandthereareemployeerepresentativesinit.GiventhattheNewCompanyLawstipulatesthattheboardofsupervisorsmustincludeacertainproportionofemployeerepresentatives,anFIEwillnotneedtoappointemployeedirectorsifithasalreadyestablishedaboardofsupervisors.Thisis
117、becauseallboardsofsupervisorsshouldinherentlyincludeemployeerepresentativesbydefault.ForFIEs,introducingemployeedirectorsmayraisesomeconcernsamongshareholders.Whilehavingemployeerepresentativesparticipateindecisionsrelatedtoemployeeinterestscanhelpreflectandsafegua
118、rdthoseinterests,themajorityofboarddecisionsarenotdirectlytiedtoemployeematters.Thequalificationsandabilitiesofemployeedirectorstomakerationaldecisions,aswellastheirabilitytomaintainconfidentiality,needtobetestedinpractice.Consequently,asashort-termstrategy,FIEs
119、canconsiderhavingexecutiveswithemployeestatus(suchasmanagers)concurrentlyserveasemployeedirectorsorsupervisors,andindoingsoavoidsubstantialchangestotheboardsstructure.Futureclarificationsareneededonhowtheemployeedirectormechanismworksinpractice.Powerdivisionamo
120、ngshareholders,directors,andexecutivesTheNewCompanyLawgrantsgreaterflexibilityintheallocationofpowersamongshareholdersmeetings,boardsofdirectors,andexecutives.Notably,thestatutorypowersofshareholdersmeetingshavebeensomewhatreduced.Mattersthatwerepreviouslyreservedfor
121、shareholdersmeetings,suchasdecisionsonthecompanysbusinesspoliciesandinvestmentplans,nowfallwithinthepurviewoftheboardofdirectorsundertheNewCompanyLaw.Additionally,beyondtheenumeratedscopeofboardofdirectorspowers,shareholdersmeetingscanexplicitlygrantadditional
122、authoritytotheboardofdirectors.Forinstance,shareholdersmeetingsmayauthorizetheboardofdirectorstomakedecisionsregardingtheissuanceofcorporatebonds(Article59).Simultaneously,thenewlaweliminatesthespecificlistingofmanagerialpowersfoundintheexistingCompanyLaw.Manage
123、rialauthorityisnowentirelysubjecttothecompanysarticlesofassociationandtheagreementsoftheboardofdirectors(Article74).Forforeigninvestors,thisadjustmentholdsparticularsignificance.Inpractice,overseasshareholdersofFIEsfacechallengesincloselymonitoringandmakingdecis
124、ionsaboutthedailyoperationsofdomesticcompanies.Furthermore,manyforeigncompaniesadheretoaboard-centricgovernancemodel,wheretheboardofdirectorsisresponsibleforoperationalandinvestmentdecisions,whilecorporateexecutiveshandleday-to-dayoperations.Thischangeinpoweralloca
125、tionalignsbetterwiththeoperationalhabitsofforeignChinaBriefingIssue203April202416investors,allowingthemtooptimizegovernancestructuresbasedontheirspecificcircumstancesandenhancemanagementefficiency.Rulesofproceduresfordecision-makingTheNewCompanyLawhasadjustedthe
126、rulesofproceduresforshareholdermeetingsandboardmeetingsofLLCs.Someoftheexistingrulesapplicableonlytojoint-stockcompaniesnowextendtolimitedliabilitycompanies.Theseinclude:Shareholdermeetingresolutionsmustbeapprovedbyshareholdersrepresentingmorethanhalfofthevot
127、ingrights(Article66).Boardmeetingsmusthaveamajorityofdirectorspresenttobeheld.Boardresolutionsrequiretheagreementofmorethanhalfofalldirectors(Article73).Ifthenumberofattendeesisinsufficientorthenumberofpeopleagreeingtoaresolutiondoesnotmeettherequirements
128、oftheNewCompanyLaworthecompanysarticlesofassociation,theresolutionsoftheshareholdermeetingorboardmeetingarenotvalid(Article27).UndertheexistingCompanyLaw,therearefewrestrictionsontherulesandvotingproceduresforLLCs.Enterprisesenjoysignificantflexibilitytomut
129、uallyagreeuponproceduralrules.Topreventdecision-makingdelayscausedbyinadequateattendance,somecompaniesexceptformattersmandatingapprovalbytwo-thirdsormoreofallvotingrightsshareholdersmayspecifythatdecisionsarevalidbasedontheactualnumberofattendees.Thiscouldbeun
130、animous,anabsolutemajority,orasimplemajority.Furthermore,ifashareholderordirectorconsistentlyfailstoattendmeetingsorvoiceopinionsafterreceivingnotices,thecompanysarticlesofassociationmaystipulatethattheactualnumberofattendeesconstitutesthestatutoryquorumforspeci
131、ficmeetings.GiventhattheNewCompanyLawhasclearlydefinedvotingmechanismsandstatutorymeetingattendancerequirementsforLLCs,thefeasibilityoftheabovemechanismswillbechallenged.EfficientandstablebusinessoperationsforFIEsheavilyrelyonthesuccessfulpassageofshareholder
132、andboardresolutions.FIEsshouldreevaluatetheirexistingmeetingrules,assesspotentialrisks,andtakepreliminarymeasures.Forinstance,FIEscanconsidersettingupreplacementmechanismsfordirectorswhoarefrequentlyabsent,toavoiddecision-makingdelayscausedbyfailuretomeetthestatut
133、orynumberofdirectorsinboardmeetings.DismissalofdirectorsArticle71oftheNewCompanyLawstipulatesthatifashareholdermeetingunreasonablyremovesadirectorbeforetheirtermexpires,thedirectormayrequestcompensationfromthecompany.Thisprovisiondivergesfromthelong-standingp
134、erceptionheldbyforeignshareholders.Foreigninvestorsgenerallybelievethatshareholdershavetheauthoritytoarbitrarilyremovedirectorstheynominatewithoutcause,asthisreflectstheirshareholderrights.ConsideringtheimplementationofthedirectorcompensationsystemundertheNewCompa
135、nyLaw,whetherforWFOEsorJVs,prudentevaluationisessentialwhenremovingdirectorsbeforetheirtermexpires.Companiesareadvisedtoconfirminwritingwiththedirectorthattherearenounresolveddisputesorcompensationmattersbetweenthemandthecompany.Thisproactivestephelpsprevent
136、potentialdisagreementswithdepartingdirectorsinthiscontext.ChinaBriefingIssue203April202417SeniormanagementdutiesThepersonalliabilityofdirectors,supervisors,andexecutives(“seniormanagement”)havealwaysbeenahottopicforforeigninvestors.Executivesherereferstomanagers,depu
137、tymanagers,chieffinancialofficers,thecompanysecretaryofalistedcompany,andotherindividualsspecifiedinthecompanysarticlesofassociation.Thestrengthenedfiduciarydutyanddiligenceobligationofseniormanagementpersonnel,aswellastheirliabilitytowardsthecompanyandthirdpart
138、iesisanotherfocusoftheNewCompanyLaw.Specifically,theNewCompanyLawclarifiesthedutyofseniormanagementpersonnelinthefollowingaspects:Itestablishesprinciplesandstandardsforthefiduciarydutyanddiligenceobligationsofseniormanagement;includessupervisorsand“closerelativ
139、esofdirectorsandsupervisors,aswellasenterprisesdirectlyorindirectlycontrolledbythem”inthescopeofregulationforrelated-partytransactionsandindustrycompetition(Article180).Ifseniormanagementpersonnelcauseharmtootherswhileperformingtheirduties,thedirectorssharebear
140、compensationliabilityresponsibilitytogetherwiththecompany,wheretheyactintentionallyorwithgrossnegligence(Article191).Itreinforcestheobligationofseniormanagementpersonneltoindependentlycomplywiththeirduties.Iftheyengageinactionsharmfultothecompanyorshareholdersba
141、sedoninstructionsfromcontrollingshareholdersoractualcontrollers,theywillbejointlyliable(Article192).Itemphasizesthedutyofseniormanagementpersonneltomaintainthecompanyscapitaladequacy.Directorsandsupervisorswhofailtofulfilltheirresponsibilitieswillbejointlyliable
142、orsubjecttocompensationliability(Article51,53,163,211,and226).Itclarifiesthedutyofdirectorsasliquidatorsofthecompanyandthecompensationliabilityforfailuretoperformsuchduties(Article232).Inthiscontext,seniormanagementpersonnelneedtofulfilltheirstatutorydutiesand
143、obligationsactivelyandcomprehensively.ThisshiftisexpectedtoimpactthepersonnelarrangementsandworkflowofmanyFIEs.Generally,withinthecurrentmanagementstructureofforeigncompanies,seniormanagementpersonnelaresimultaneouslyboundbytheirfiduciarydutiestothecompanyandthe
144、managementsystemandconstraintswithintheentiregroup.Whilealignmentisoftenfeasible,conflictsmayariseincertainsituations.Forexample,consideraforeign-nominateddirectorwithinthecompanywhoapprovedasignificantinvestmentbasedoninstructionsfromtheoverseasheadquarters.Iftha
145、tinvestmentfailsandcauseslossestothecompany,scrutinywillfocusonwhetherthesedirectorsappropriatelyfulfilledtheirfiduciaryanddiligenceobligations.Moreover,inmanyFIEs,someseniormanagementpersonnel,especiallythoseaffiliatedwiththeheadquartersandbasedoverseas,maynotsub
146、stantiallyparticipateinthecompanysoperationsanddecision-makingduetopracticalconstraints.ThisisnolongersuitableundertheNewCompanyLaw.Werecommendappointingindividualsfamiliarwiththecompanysbusinessanddeeplyinvolvedinactualoperationsasseniormanagementpersonneltom
147、itigatetherisksassociatedwithfailingtomeetthefiduciaryanddiligencestandardsunderthenewlaw.ChinaBriefingIssue203April202418EquitytransferArticle84oftheNewCompanyLawintroducestwosignificantchangesregardingequitytransfers:Removalofconsentrequirement:Previously,when
148、ashareholdertransferredsharestoanexternalparty,otherexistingshareholdershadtherighttoconsentorobject.Now,undertheNewCompanyLaw,ifothershareholdersreceivewrittennoticeofthesharetransferanddonotrespond,itisdeemedthattheyhavewaivedtheirpre-emptivepurchaserigh
149、ts.Clarificationof“sameconditions”forthepre-emptivepurchaserights:TheNewCompanyLawnowexplicitlydefinessameconditionsasdetailssuchasquantity,price,paymentmethod,anddeadlinespecifiedinthesharetransfernotice.Thislegalrefinementenhancestheimplementationprocessofpre-emp
150、tivepurchaserights.Asmentionedearlier,FIEsespeciallyJVstendstoexercisecautionwhenintroducingnewpartners.Inmanycases,foreigncompaniesestablishJVswithdomesticenterprisesbasedonbusinesscooperationneeds.Suchpartnershipsresemblea“marriage”betweentwoentities.Thechangedpro
151、visionsonequitytransfer,accordingtowhichashareholdercandirectlytransfertheirshareswithouttheotherpartysconsent,maydisruptthestabilityofthe“marriage”.Particularly,whenforeigncompaniesareminorityshareholders,suddendeparturesbymajorityshareholderscanleavetheremaining
152、minorityshareholdersinanawkwardposition.Theymaylacktheresourcestoacquirethemajorityshareholderssharesandenduphavingtodealwithcompletelyunfamiliarnewshareholders.Fortunately,Article84oftheNewCompanyLawprovidesanexceptionifthecompanysarticlesofassociationstipu
153、lateotherwiseregardingsharetransfers,thoseprovisionsshallprevail.Therefore,tomaintainstabilityinthecooperativerelationshipbetweenbothparties,partiesoftheJVarehighlyrecommendedtostipulateequitytransferrestrictionsintheJVagreementandarticlesofassociations.Non-proport
154、ionalcapitalreductionArticle224oftheNewCompanyclarifiesthatwhenacompanyreducesitsregisteredcapital,thecorrespondingreductioninthecontributionamountorsharesshouldbemadeaccordingtotheproportionofshareholderscontributionsorholdings.Thatistosay,proportionalcapital
155、reductionistheprinciple.Exceptionsaremadeinthefollowingcases:wherethelawstipulatesotherwise;iftherearespecificagreementsamongallshareholdersofanLLC;orthearticlesofassociationofajoint-stockcompanyspecifyotherwise.Non-proportionalcapitalreduction,ortargetedcapital
156、reductionisnotacommonpracticeforFIEs.Itisusuallyappliedinsomeequityinvestmentprojects,whereinvestorsrequirethecompanybuybackitsequityundercertaincircumstances.However,undertheNewCompanyLaw,foreigninvestorsmayviewtargetedcapitalreductionasaviablemethodforas
157、hareholdertoexitthecompany,giventhatthenewlawexplicitlypermitstargetedcapitalreductionbasedonunanimousshareholderconsent.Toensuretheeffectivenessofthiswithdrawalmechanism,aclearanddetailedagreementoutliningtheconditionsoftargetedcapitalreductionshouldbeestablis
158、hed,confirmed,andsignedbyallshareholders.ChinaBriefingIssue203April202419BUSINESSADVISORYSERVICESBusinessAdvisoryteamsareexpertswithintheirfieldsandhavehelpedthousandsofinternationalclientsnavigateAsiasbusinessandregulatorylandscapes.Weworkwithclientstoaddressspe
159、cificissuesandprojects,aswellaswithinmulti-disciplinaryadvisorytaskforcemodelsalongsideourin-housetax,audit,HR,andtechnologyteams.IfyouneedassistanceinaligningyourbusinesswiththeNewCompanyLaworanyotheradvisories,pleasecontact.EXPLOREMOREKeytakeawaysOverall,theNew
160、CompanyLawintroducessignificantrevisions,withafocusonoptimizingcorporategovernancestructures,strengtheningshareholdersresponsibilitiesregardingcapitalcontributions,andenhancingthedutiesofdirectors,supervisors,andexecutives.Thesechangeswillhaveasubstantialimpactonvariou
161、stypesofcompanies,includingFIEs.ForFIEs,regardlessofwhethertheyhavealreadyadjustedtheirorganizationalstructureaccordingtotheexistingCompanyLaw,itiscrucialtoconsidertheimplicationsoftherevisionsintroducedintheNewCompanyLaw.Understandinghowthenewlawalignswitho
162、rdiffersfromtheexistingoneisessential.Specifically,attentionshouldbegiventowhetherthenewlawmerelytriggerstechnicaladjustmentstorelevantorganizationaldocumentsorifitnecessitatessubstantialchangestoexistingbusinessarrangements(suchasboardmemberstructuresorcapital
163、arrangements).Inthelattercase,FIEsmayneedtoengageinnewbusinessnegotiationswithpartnerspromptly.Furthermore,FIEsaffectedbychangesintroducedbytheNewCompanyLaw,suchasthe5-yearcapitalcontributionrequirementsoremployeedirectormandates,shoulddiligentlytracksupplementar
164、yclarificationsissuedbyregulatoryauthorities.Thismonitoringisparticularlyimportantwithregardstothetransitionofrequirementsfromoldtonewlawsforexistingcompanies.HowtoPreparefortheNewCompanyLawUnderstandthenewprovisionsintroducedintheNewCompanyLaw.Reviewingexis
165、tingcorporatestructures.Reviewingcorporatedocumentsandidentifyareasthatneedadjustments.Evaluatetheimplicationsofthechangesfrommultipleperspectivesandconsiderthemwhenmakingbusinessdecisions,suchaswhenconsideringequitytransfer.Monitorfuturedevelopmentsforareasneeding
166、furtherclarifications.Providenecessarytrainingtorelevantpersonnelsuchasshareholdersanddirectors.Seeklegalcounselandexpertadvicewhennecessary.Insummary,theNewCompanyLawsignificantlymodifiesChinascorporategovernancelandscapeandhasbroadimplicationsforforeigninvestors
167、andFIEsacrossvariousaspects.Businessesareadvisedtostayinformedaboutthelatestlegalrequirementsandsubsequentclarificationsissuedbyregulatoryauthorities.Assessingtheurgencyandcomplexityofnecessaryadjustmentsbasedontheirspecificcircumstancesisessential.Whennecessary,
168、seekingassistancefromexternallegalserviceteamsisadvisable.ChinaBriefingIssue203April202420TaxImplicationsUndertheNewCompanyLawUndertheNewCompanyLaw,companiesandstakeholdersfacenewtaximplications.Aheadofitsimplementation,thoroughunderstanding,stayinginformed,andcons
169、ultinglegalandtaxexpertsareessentialforproactiveriskmanagement.Chapter3QianZhouManager,ChinaBriefingAuthorAgainstthebackdropoftheNewCompanyLaw,companies,shareholders,andcreditorswillfacenewtaximplications.Beforecommittingcapitaltoanewcompany,decidingthecontribution
170、form,decidingtobuyorselltheequityinacompany,orplanningtoreducecapitalformakinguplosses,companiesandindividualinvestorsareadvisedtocarefullyconsiderthecorrespondingtaximplicationsandadoptacautiousyetproactiveapproachfortaxplanningandfinancialstrategydevelopm
171、ent.Five-yearsubscribedcapitalpaymenttermandrelevanttaximplicationsArticle47oftheNewCompanyLawstipulatesthatshareholdersofaLimitedLiabilityCompany(LLC)mustfullypaytheirsubscribedcapitalwithinfiveyearsfromthecompanysestablishment.Thisfive-yearcontributiontermappl
172、iesnotonlytonewcompaniesbutalsotoexistingcompaniesestablishedbeforetheNewCompanyLawtakeseffectonJuly1,2024.Forthelatter,itisnecessarytoadjusttheircontributiontermtoalignwiththenewfive-yearrequirementduringthetransitionperiod.Pre-taxdeductionofinterestexpe
173、nseAccordingtoArticle38oftheImplementationRegulationsfortheCorporateIncomeTaxLaw(CITRegulation),thefollowinginterestexpenditureincurredbyanenterpriseinproductionandbusinessactivitiesshallbedeductible:Interestexpenditureforborrowingsmadebyanon-financialenterprise
174、fromafinancialenterprise;Interestexpenditureforapprovedbondsissuedbyanenterprise;andInterestexpenditureforborrowingsmadebyanon-financialenterprisefromanon-financialenterprisewhichdoesnotexceedtheamountcomputedaccordingtotheinterestrateforsametypeofloansofa
175、financialenterpriseduringthesameperiod.ChinaBriefingIssue203April202421Inaccordancewiththeseprovisions,theinterestexpensesrelatedtoacompanysexternalloansareeligibleforpre-taxdeduction.However,theReplyoftheStateTaxationAdministrationonPre-taxDeductionofInterestE
176、xpensesIncurredonUnpaidInvestmentsbyEnterpriseInvestors(GuoShuiHan2009No.312)imposescertainlimitationsonthistaxtreatment.AsperGuoShuiHan2009No.312,ifaninvestorfailstopaythepayablecapitalamountwithinthespecifiedperiod,theinterestincurredfromexternalborrowingse
177、quivalenttotheinterestpayableonthedifferencebetweentheactualpaid-upcapitalandthecapitalamountduewithinthestipulatedperiodshallnotbeconsideredareasonableexpenditurefortheenterprise.Thus,thisinterestburdenshallbebornebytheinvestorsandcannotbedeductedwhencalc
178、ulatingthetaxableincomeoftheenterprise.Theterm“specifiedperiod”generallyreferstothecapitalcontributiontimeframespecifiedinthearticlesofassociation.UndertheexistingCompanyLaw,thereisnospecifictimelimitforcapitalcontributions,leadingmanyenterprisestosetlengthycont
179、ributionterms.Insuchcases,triggeringthepre-taxdeductionrestrictiononloaninterestbecomeslesslikely.However,withtheintroductionofthe5-yearcontributiontermrequirementintheNewCompanyLaw,ithasbecomeeasiertoactivatetheloaninterestdeductionrestrictions.Therefore,werecom
180、mendthatLLCswithasubstantialamountofoutstandingunpaidcapitalexercisevigilancewhenobtainingexternalloans.Itisadvisabletoproactivelyengagewithcompetenttaxauthoritiestoclarifytheapplicabletaxtreatment,accuratelycalculatethepre-taxdeductionforinterestexpenses,andfu
181、lfillenterpriseincometaxobligations.Additionally,Article49oftheNewCompanyLawstatesthatshareholderswhofailtotimelypaytheircapitalcontributioninfullmustnotonlysettlethefullamountowedtothecompanybutalsoassumeliabilityforanyresultinglossesincurredbythecompan
182、y.Ifthecorrespondinginterestcannotbedeductedbeforetaxduetotheshareholdersunpaidcontribution,thecompanyisentitledtorequesttheshareholdertobearthistaxloss.Potentialtaxoncapitalreduction.UnderthecontextoftheNewCompanyLaw,manycompaniesmayopttoreducetheirregist
183、eredcapitaltolowertherequiredpaid-incapital.Reducingcapitalmaytriggerincometaxliabilities.Takingthecompanyshareholdersasanexample,accordingtotheStateTaxationAdministrationAnnouncement2011No.34,theassetsobtainedbyaninvestingenterprisethroughcapitalreductioncanbe
184、dividedintothreecategories:Investmentcostrecovery:Thiscorrespondstotheportionofassetsacquiredbytheinvestingenterprisefromtheinvestedenterprise,equivalenttotheinitialcapitalcontribution.Dividendincome:Equivalenttotheproportionofundistributedprofitsandaccumulatedsurp
185、lusreservesoftheinvestedenterprise,calculatedbasedonthereductioninpaid-incapital.Incomefrominvestmentassettransfer:Theremainingportion.Amongthethreecategories,onlytheportionrelatedtoincomefrominvestmentassettransferissubjecttoCITpayment.UndertheNewCompanyLaw,wh
186、encompaniesdecreasetheirregisteredcapitaltolowerpaid-incapital,shareholdersmaynotreceiveincomefrominvestmentassettransfersduetothecapitalChinaBriefingIssue203April202422TaxAnalysisofCapitalContributionintheFormofEquityRightsIncometaxValue-addedtax(VAT)Individua
187、lshareholdersPayindividualincometax(IIT)basedon“incomefrompropertytransfer”.EligibleindividualscanpayIITininstallmentsover5years.CapitalcontributionbyequityofanunlistedcompanyisnotsubjecttoVAT.CapitalcontributionbysharesoflistedcompanyissubjecttoVATattherat
188、eof6%.IndividualshareholdersmightbeexemptfromVATforcapitalcontributioninthesharesoflistedcompanies.CorporateshareholdersThecapitalcontributionshallbetreatedassalesrevenue,subjectingtoCIT.Eligibleentitiescanpayininstallmentsover5years.Incomemaynotberecognized
189、underspecialtaxtreatment.reduction,thusavoidingCITpayment.However,ifacompanyhassignificantnetassetsandretainedearnings,shareholdersreducingcapitalwithoutreceivinginvestmentincomemayfacescrutinyfromthetaxbureau.Taximplicationofnon-monetarycontributionsArticle48ofthe
190、NewCompanyLawaddsthatashareholdermaymakecapitalcontributionsinequityrightsandcreditorsrights,inadditiontothepreviouslyforms.Equityanddebtinvestmentsbothfallunderthecategoryofnon-monetarycontributions,whichofteninvolvecomplextaximplications.Takingequityinvestme
191、ntasanexample,theprimarytaxanalysisissummarizedinthefollowingtable:Moreover,whentransferringassetslikeequityandcreditorsrights,itmayentaildebtrestructuringbetweenenterprises,leadingtocomplextaxtreatment.Additionally,capitalcontributioninnon-monetaryassetsmayqualify
192、forspecificpreferentialtaxtreatment.Giventhese,evaluatingthetaxburdenassociatedwithnon-monetarycontributionsiscomplicated,withtaximplicationsdifferinggreatlydependingonthenatureofthenon-monetaryinvestment.Therefore,wehighlyrecommendthatbothcompaniesandindividualsth
193、oroughlyassesspotentialtaxburdensbeforehandwhenmakingnon-monetaryassetcontributions.Recognizingthesetaximplicationsascrucialelementsininvestmentcostsisimperative.PotentialtaximplicationsforequitytransferArticle88oftheNewCompanyLawaddsthatthetransferorandtransfer
194、eeinequitytransferbearjointliabilityfortheinsufficientcapitalcontribution,unlessthetransfereeisnotawareandoughtnottoknowthatthetransferorfailstomakecapitalcontributionasprescribedorthenon-monetarypropertyusedascapitalcontributionisdefective.Inthiscontext,th
195、eobligationofthetransfereetoassumethecontributionsforthetransferorshouldbefactoredintotheconsiderationfortheequitytransferwhencalculatingcapitalgains,andcorrespondingIITorCITshouldbepaidconsequently.ChinaBriefingIssue203April202423Profitdistributionandrelevan
196、ttaximplicationsArticle212oftheNewCompanyLawaddressesthestatutorydeadlineforprofitdistribution.Itmandatesthatcompanyboardsmustdistributeprofitswithinsixmonthsfromthedatewhenshareholdersmeetingspassprofitdistributionresolutions.Theamendmentaimstoreducethetime
197、gapbetweenresolutionandactualprofitdistributionwithincompanies.However,doesthisaccelerationimplyafastertaxobligationforshareholdersdividendincomeForresidententerpriseshareholders,inmanycases,thedividendincometheyreceivefrominvestedresidententerprisescanenjoyCITex
198、emption.EvenifdividendincomeissubjecttoCIT,GuoShuiHan2010No.79specifiesthatincomefromequityinvestmentsintheformofdividendsorbonusesshouldbedeterminedbasedonthedatewhentheinvestedenterprisesshareholdersmeetingmakesprofitdistributiondecisions.Therefore,thetimi
199、ngoftaxobligationsforresidententerpriseshareholdersregardingdividendincomeremainsunaffected.Nevertheless,fornon-residententerpriseshareholdersandindividualshareholders,theirdividendincometaxisgenerallywithheldatthesourceduringpayment.Thismeansthattheinvestedenterpri
200、sedeductsandwithholdstaxeswhendistributingdividends.Consequently,earlyprofitdistributionmayimpactthetax-relatedarrangementsfortheinvestedenterprise.Companieswithsuchshareholdersshouldnotonlypromptlycarryoutprofitdistributionwithinthestatutoryperiodbutalsopreparef
201、orrelevanttax-relatedworktoensuretimelyandcomplianttaxwithholdingdeclarations.KeytakeawaysAstheeffectivedateofimplementationoftheNewCompanyLawapproaches,relevantentitiesmustconsidernotonlythevariouschangesintroducedbythenewlawbutalsothepotentialtaximplicatio
202、nswhenundertakingactions,suchascompanyestablishment,capitalcontribution,equitytransfer,profitdistribution,andlosscompensation.TherecentrevisionoftheCompanyLawencompassesallstagesofacompanyslifecycle,fromregistrationtodissolutionandliquidation.Thetaximplicationsassoci
203、atedwiththesechangesextendwellbeyondthescopeofthisarticle.WerecommendthatrelevantentitiesthoroughlystudytheNewCompanyLaw,stayinformedaboutsubsequentlegalregulations,andassessthecomprehensiveimpactofthenewlawontheirinvestmentandbusinessplanning.Whennecessary,b
204、usinessescanalsomaintaincommunicationwithlegalandtaxspecialiststoproactivelyaddresspotentialbusinessandtaxrisks.TAXADVISORYDezanShira&AssociatestaxprofessionalshaveadeepunderstandingofAsiascomplextaxenvironments,aswellasin-depthindustryknowledgeandexperience.Our
205、experiencedteamoftaxaccountants,lawyers,andex-taxofficialscanhelponawidespectrumoftaxserviceareasacrossallmajorindustries.Formoreinformationonourtaxservices,pleasecontact.EXPLOREMOREScanthisQRcodeVisitourmobilepageandgetthelatestupdatesinvestorsnewsandresou
206、rceswithAsiapediaisacollectionofresourcesbasedonwhatwehavelearnedaboutdoingbusinessinAsia.AreyoumakingchangestoyouroperationsinAsiaGetstartedbyspeakingtoourprofessionalstodayChina.HongKongSAR.Australia.Bangladesh.DubaiUAE.Germany.India.Indonesia.Italy.Japan.Malay
207、siaMongolia.Nepal.Singapore.SouthKorea.SriLanka.Thailand.Turkiye.ThePhilippines.UnitedStates.VietnamOurOfficesinChinaBHongKongSARDDGNHHSQSZSTAccounting|AuditandFinancialReview|BusinessAdvisory|BusinessIntelligenceCorporateEstablishmentandGovernance|DueDiligence|HRandPayroll|MergersandAcquisitions|OutboundDirectInvestment|RiskManagement|Tax|Technology