Tax-related: The Tax Impact of the "Shareholder Contribution Period" of the New Company Law on Shareholders of Existing Companies
Author | Zhiheng (Haikou) Law Firm, Lawyers Deng Chuanlong, Li Fang, Liu Qiongwen
On December 29, 2023, the 7th meeting of the Standing Committee of the 14th National People's Congress voted to approve the newly revised "Company Law of the People's Republic of China" (hereinafter referred to as the "New Company Law"), which will come into effect on July 1, 2024. Compared with the previous provisions, the new "Company Law" has made adjustments in the company capital system, company organization, shareholder rights and responsibilities distribution, company establishment and exit mechanism, and at the same time clarified the relevant responsibilities of shareholders.
This article will explain the tax impact of the new Company Law on shareholders of existing companies from the perspective of "shareholders' capital contribution period".
I. Provisions on the period of shareholders' capital contribution in the new Company Law
(1) Newly established company: The maximum investment period shall not exceed five years
Article 47 of the new "Company Law" stipulates that: The registered capital of a limited liability company is the amount of capital subscribed by all shareholders registered with the company registration authority. The amount of capital subscribed by all shareholders shall be paid by shareholders within five years from the date of establishment of the company in accordance with the provisions of the company's articles of association. Where laws, administrative regulations and decisions of the State Council have other provisions on the actual payment of registered capital of a limited liability company, the minimum amount of registered capital and the period of shareholder investment, such provisions shall prevail.
(2) Existing companies: three-year transition, five-year full payment
The second paragraph of Article 266 of the new "Company Law" stipulates that: For a company that has been registered and established before the implementation of this Law, if the investment period exceeds the time limit stipulated in this Law, it shall be gradually adjusted to within the time limit stipulated in this Law unless otherwise stipulated by laws, administrative regulations or the State Council; where the investment period and investment amount are obviously abnormal, the company registration authority may require it to make timely adjustments according to law. The specific implementation measures shall be formulated by the State Council.
On February 6, 2024, the State Administration for Market Regulation issued the "Regulations of the State Council on the Implementation of the Registered Capital Registration Management System of the Company Law of the People's Republic of China (exposure draft) ", which sets a three-year transition period for existing companies established before the implementation of the new "Company Law". The transition period is from July 1, 20
24to June 30, 2027.
The limited liability company can adjust the investment period to less than five years during the transition period, and the completion of the investment before June 30, 2032 will meet the requirements. At the same time, it is clear that if the remaining subscription period of the limited liability company is less than five years from July 1, 2027, the investment period does not need to be adjusted.
It should be noted that the "three-year transition" does not apply to all existing companies. For existing "abnormal" companies with a capital contribution period of more than 30 years and a capital contribution amount of 1 billion yuan, the articles of association of the company must be amended before December 31, 2024, the capital contribution period and capital contribution amount shall be adjusted to a reasonable range, and the actual capital contribution shall be completed within 5 years from the date of modification.
II. Consequences of shareholders failing to pay their capital contributions on time
1. The establishment shareholders bear joint and several liability. Article 50 of the new "Company Law" stipulates that: When a limited liability company is established, if the shareholders fail to pay the actual capital contribution in accordance with the company's articles of association, or the actual price of the non-monetary property actually contributed is significantly lower than the subscribed capital contribution, the other shareholders at the time of establishment and the shareholder shall bear joint and several liability within the scope of insufficient capital contribution.
2. Directors are liable for compensation. Article 51 of the new "Company Law" stipulates that after the establishment of a limited liability company, the board of directors shall check the situation of shareholders' capital contribution. If it is found that a shareholder has not paid the capital contribution stipulated in the company's articles of association in full on time, the company shall issue a written reminder to the shareholder to urge the capital contribution. If the obligations stipulated in the preceding paragraph are not performed in time, causing losses to the company, the responsible director shall be liable for compensation.
3. Unfunded shareholders lose their rights. Article 52 of the new "Company Law" stipulates that: If a shareholder fails to pay the capital contribution on the date of capital contribution stipulated in the company's articles of association, and the company issues a written reminder to call for capital contribution in accordance with the provisions of the first paragraph of the previous article, it may specify the grace period for payment of capital contribution; the grace period shall not be less than 60 days from the date the company issues the reminder.
If the grace period expires and the shareholder still fails to fulfill the obligation of capital contribution, the company may issue a notice of loss of rights to the shareholder upon the resolution of the board of directors, and the notice shall be issued in writing. From the date of issuance of the notice, the shareholder shall lose the equity he has not paid for the capital contribution. The equity lost in accordance with the provisions of the preceding paragraph shall be transferred according to law, or the registered capital shall be reduced and the equity shall be cancelled accordingly; if it has not been transferred or cancelled within six months, the other shareholders of the company shall pay the corresponding capital contribution in full according to the proportion of their capital contribution
4. Shareholders who have not yet made capital contributions are liable to pay in advance. Article 54 of the new "Company Law" stipulates that if a company cannot pay off its due debts, the company or the creditors of the due creditor's rights have the right to require shareholders who have subscribed for capital contributions but have not yet made capital contributions to pay in advance.
III. Coping strategies and tax implications for shareholders of existing companies
The content of the new "Company Law" and the "Regulations of the State Council on the Implementation of the Registered Capital Registration Management System of the" Company Law of the People's Republic of China " (exposure draft) " reflects the state's emphasis on the actual payment of registered capital by shareholders and the spirit of protecting the interests of creditors. Based on this, shareholders need to pay enough attention to the issue of the actual payment of the company's registered capital. In particular, shareholders of existing companies that have been established should take into account factors such as the company's size, financial strength, and development needs. Reasonable planning of the company's registered capital and shareholding structure should be carried out, and the obligation to pay the registered capital should be fulfilled in a timely manner.
(1) Progressive payment of capital contributions
For a stock company with strong financial strength and good operating performance, gradually paying up the capital in accordance with the articles of association is the first choice to ensure the effective operation of the company. In this case, there is no impact on the taxation of shareholders of the stock company for the time being.
(2) Reduction of registered capital
Since the 2013 Company Law adopts the registered capital subscription system, a large number of companies will extend the subscription period to 30 or 50 years when they are established. The amendments to the Company Law will undoubtedly have a greater impact on the capital planning of shareholders of such stock companies. In order to ensure the normal operation of enterprises and the reasonable transition of shareholders' rights, some shareholders with tight cash flow are likely to choose to take the initiative to reduce capital.
In addition, the "Regulations of the State Council on the Implementation of the Registered Capital Registration Management System of the Company Law of the People's Republic of China (exposure draft) " mentioned that "in response to the possible demand for capital reduction, the process and materials for adjusting the period and amount of capital contribution shall be optimized, and the level of online processing facilitation shall be improved." It also further explains that after the revision of this company law, there will be a wave of capital reduction by a number of existing companies in the market.
The provisions of the new "Company Law" on capital reduction are mainly reflected in Article 224 (General Capital Reduction), Article 225 (Simple Capital Reduction) and Article 226 (Illegal Capital Reduction). For individual shareholders, the tax treatment involved in capital reduction is based on the "Announcement of the State Administration of Taxation on the Collection of Individual Income Tax on Individuals Termination of Investment and Business Recovery" (Announcement No. 41 of the State Administration of Taxation, 2011).
This means that in the case of capital reduction, the income from equity transfer, liquidated damages, compensation, compensation and other items recovered by individual shareholders from the company or other shareholders are all taxable income of personal income tax, and personal income tax should be calculated according to the "income from property transfer" and the applicable 20% tax rate.
The formula for calculating the personal income tax payable is: personal income tax = taxable income ✖ 20% = (the total amount of equity transfer income, liquidated damages, compensation, compensation and other items recovered by the individual - the original actual investment amount/investment amount and related taxes) ✖ 20%.
Therefore, when the return on investment is higher than the cost of investment, shareholders who reduce their capital need to pay personal income tax.
In addition, paragraph 3 of Article 224 of the new "Company Law" stipulates that: When a company reduces its registered capital, it shall reduce the amount of capital contribution or shares according to the proportion of shareholders' capital contribution or shares, unless otherwise stipulated by law or otherwise agreed by all shareholders of a limited liability company or otherwise stipulated in the articles of association of the joint stock company.
That is to say, when the company reduces capital, it should in principle reduce capital according to the capital contribution or shareholding ratio, but when there is an agreement between shareholders or the articles of association stipulate that the capital can be reduced proportionally. Therefore, when the company reduces the registered capital, some shareholders will reduce capital, and some shareholders will not reduce capital. The shareholders who have not reduced capital may have a tax impact due to the reduction of capital by other shareholders, which mainly depends on whether the reduced capital is paid to the reduced shareholders according to the share of net assets corresponding to the shareholding.
Specifically:
1. When the capital reduction shareholder recovers the investment according to the share of the company's net assets at the time of the capital reduction, and the value of the equity held by the unreduced shareholder has not changed, the capital reduction behavior will not have a tax impact on the unreduced shareholder.
2. When the investment amount recovered by the reduced shareholder is higher than the company's net asset share, the corresponding value of the equity held by the unreduced shareholder will decrease, which means that the interests of the unreduced shareholder will be damaged, and there is no need to pay taxes at this time.
3. When the investment amount recovered by the unreduced shareholder is less than the company's net asset share, the corresponding value of the equity held by the unreduced shareholder will increase, which means that the unreduced shareholder has obtained benefits. Although this part of the value-added benefits of the unreduced shareholder has not been realized, there is a risk of being required by the tax authorities to implement tax adjustments.
(3) Cancellation of the company
If the company has not operated for a long time or has serious difficulties in operation, under the pressure of the new "Company Law" to pay capital contributions within a time limit, shareholders may choose to directly cancel the company. Chapter 12 of the new "Company Law" stipulates the specific requirements for company dissolution and liquidation. Combined with the "Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Treatment of Enterprise Income Tax in Enterprise Liquidation Business" (Cai Shui [2009] No. 60), we will find that the process of canceling the company is not only cumbersome, but also the tax issues involved are relatively complicated.
Mainly manifested as:
1. Clearing up creditor's rights and debts. The company may involve value-added tax, land value-added tax, consumption tax, additional tax and many other taxes when clearing up creditor's rights and debts.
2. Liquidation income. Liquidation income refers to the realizable value or transaction price of all the company's assets, minus the tax basis of the assets, liquidation expenses, related taxes and fees, plus profits and losses on debt settlement. The company needs to calculate the liquidation income and pay corporate income tax for the entire liquidation period as a separate tax year.
3. Residual property distribution. The new "Company Law" stipulates that shareholders have the right to distribute the remaining property after the company has paid off its debts; at the same time, Cai Shui [2009] No. 60 also stipulates the realisable value or transaction price of all the assets of the enterprise minus liquidation costs, employees' wages, social insurance expenses and statutory compensation, settlement of liquidation income tax, taxes owed in previous years and other taxes, settlement of enterprise debts, and calculation of the remaining assets that can be distributed to the owner according to regulations.
The amount of the remaining assets obtained by shareholders from the company is divided into dividend income and investment transfer income (or loss), of which the part equivalent to the accumulated undistributed profits and accumulated surplus reserve of the liquidated enterprise calculated according to the proportion of the shareholders' shares is dividend income; the balance of the remaining assets after deducting dividend income, the part exceeding or lower than the shareholders' investment cost, is the shareholders' investment transfer income (or loss).
However, in practice, it often appears that the remaining property after the liquidation of the company is not money, but assets embodied in non-monetary forms such as real estate, fixed assets, intangible assets or financial assets. At this time, shareholders realize the change of asset ownership by non-transaction transfer, and do not obtain cash benefits. Shareholders passively accept the change of ownership.
Especially in the case of a downward trend in the value of non-monetary assets, the non-monetary assets acquired by shareholders may not be able to be finally realized at the fair value at the time of liquidation in the future. Since the tax law stipulates that the assets received by shareholders from the liquidated enterprise need to be determined according to the realizable value or the actual transaction price, the tax burden borne by shareholders will be higher than the actual economic benefits they can obtain.
In addition, the distribution of non-monetary assets to shareholders will also be subject to repeated taxation, such as: the transfer of non-monetary assets belongs to the taxable scope of value-added tax and needs to calculate and pay value-added tax; liquidation enterprises include assets in the liquidation income according to fair value or net realizable value, and need to pay corporate income tax; shareholders need to pay personal income tax when they receive assets.
4. In order to cancel the company as soon as possible, shareholders may give up their claims on the company. According to the State Administration of Taxation's "Announcement on Several Issues Concerning the Taxable Income of Enterprise Income Tax" (Announcement No. 29 of 2014 of the State Administration of Taxation), shareholders who give up their corporate claims are regarded as the income of the invested company, and the company may face the risk of being required by the tax authorities to adjust the corporate income tax.
5. The company exempts shareholders from loans that have not been repaid for a long time. According to the "Notice of the Ministry of Finance and the State Administration of Taxation on Regulating the Collection and Administration of Personal Income Tax for Individual Investors" (Cai Shui [2003] No. 158) issued by the Ministry of Finance and the State Administration of Taxation, the "long-term non-repayment of loans by individual shareholders" is regarded as the distribution of dividends and dividends, and personal income tax is levied. In this case, shareholders need to pay personal income tax.
Finally, it should be noted that the cancellation of the company does not mean the loss of tax risk. In our country's current laws and regulations and tax treatment practices, there are many cases in which shareholders are recovered by the tax authorities for taxes, late fees and fines after the cancellation of the company. This article will not elaborate for the time being.
Lawyer Profile
Lawyer Deng Chuanlong
Zhiheng (Haikou) Law Firm Equity Senior Partner
Member of the Disciplinary Special Committee of Hainan Lawyers Association
Member of Foreign-related and Overseas Chinese Professional Committee of Hainan Lawyers Association
Outstanding talents of foreign lawyers in Hainan Province
Mediator of Haikou International Commercial Mediation Center
Member of the Legal Service Group of the 3rd China International Consumer Goods Expo
Professional direction:
Compliance and anti-corruption, corporate governance
Litigation, arbitration, taxation
Lawyer Li Fang
Partner of Zhiheng (Haikou) Law Firm
Certified Public Accountant, Tax Accountant
Senior corporate compliance officer, fund qualification
Arbitrator of Hainan International Arbitration Court
Professional direction:
Corporate compliance, tax dispute resolution
Lawyer Liu Qiongwen
Attorney of Zhiheng (Haikou) Law Firm
Lawyer on duty of Hainan Federation of Trade Unions
Mediator of Hainan Provincial Labor and Personnel Dispute Joint Mediation Center
Professional direction:
Economic contract disputes, marriage and family disputes
Labor disputes, construction contract disputes
Civil and commercial cases such as financial loan contract disputes
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