1、Navigating Chinas New Company Law:A Guide for Foreign Investors The New Company Law in China:An Overview Considerations for Foreign Stakeholders and FIEsTax Implications Under the New Company LawPg 04Pg 10Pg 20Issue 203 April 2024|www.china- From Dezan Shira&Associates China Briefing Issue 203 April

2、 20242IntroductionCreditsPublisher-Asia Briefing Media Ltd.Lead Editor-Melissa CyrillEditor-Qian Zhou Designer-Aparajita ZadooThe sixth revision of Chinas Company Law represents the most extensive amendment in its history.From stricter capital injection rules to enhanced corporate governance,the cha

3、nges introduced in the New Company Law have far-reaching implications for businesses,including foreign invested enterprises(FIEs)operating in or entering the China market.Since January 1,2020,the Company Law has governed both wholly foreign-owned enterprises(WFOEs)and joint ventures(JVs),following t

4、he enactment of the Foreign Investment Law(FIL).Most FIEs must align with the provisions of the New Company Law from July 1,2024,while those established before January 1,2020 have bit more time for adjustments due to the five-year grace period provided by the FIL.The final deadline for their alignme

5、nt is December 31,2024.FIEs are advised to thoroughly understand the provisions of the New Company Law in how it will affect them,and initiate necessary adjustments to ensure compliance and optimize strategic planning.It is crucial that companies commence preemptive assessments and actions early on,

6、recognizing that several aspects may entail lengthy processes,including reporting to overseas headquarters,seeking board-level approvals,adjusting agreements,and negotiating with domestic partners(in the case of JVs).In this publication,we guide foreign investors through the implications of the New

7、Company Law for existing and new FIEs and relevant stakeholders.We begin with an overview of the revisions background and objectives,followed by a summary of key changes.Our in-depth analysis,from a foreign stakeholder perspective,illuminates the practical implications.Lastly,we explore tax impacts

8、alongside the revisions,demonstrating how the New Company Law may shape future business transactions and arrangements.We trust that this publication will aid you in better preparing for the New Company Law.ALBERTO VETTORETTIPartnerDezan Shira&AssociatesWith kind regards,Alberto Vwww.india-www.vietna

9、m-www.china- China Briefing Issue 203 April 20243Asia Briefing Ltd.Unit 507,5/F,Chinachem Golden Plaza,77 Mody Road,Tsim Sha Tsui East Kowloon,Hong Kong.Annual SubscriptionChina Briefing Magazine is published four times a year.To subscribe,please visit please explore the clickable resources below.Co

10、ntentsThe New Company Law in China:An Overview Pg 04Considerations for Foreign Stakeholders and FIEsPg 10Tax Implications Under the New Company LawPg 20ReferenceChina Briefing and related titles are produced by Asia Briefing Ltd.,a wholly owned subsidiary of Dezan Shira Group.Content is provided by

11、Dezan Shira&Associates.No liability may be accepted for any of the contents of this publication.Readers are strongly advised to seek professional advice when actively looking to implement suggestions made within this publication.For queries regarding the content of this magazine,please contact:All m

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13、Connect with us for the latest news,events and insights across Asia.Legal,Tax,Accounting Newswww.china- and W S Advisory and CNavigating Chinas New Company Law:A Guide for Foreign Investors China Briefing Issue 203 April 20244The New Company Law in China:An Overview On December 29,2023,the Standing

14、Committee of the National Peoples Congress(NPC)adopted an amendment to the Company Law(“New Company Law”).The final version of the New Company Law,which will come into force on July 1,2024,follows many years of draft amendments and deliberations,beginning in 2019.The New Company Law represents a com

15、prehensive overhaul of Chinas existing Company Law,addressing various aspects of corporate governance.These include the capital contribution system,company organizational structure,shareholder protection,director obligations,and corporate registration and liquidation systems,among others.As a fundam

16、ental legal framework in shaping corporate behavior,protecting shareholder interests,and promoting responsible business conduct in China,its impact extends beyond legal compliance,significantly influencing business practices and market dynamics.Companies that are already established in China or are

17、seeking to enter the Chinas New Company Law aims to create a more robust legal framework for businesses operating in China.Foreign invested enterprise operating in or entering the China market should pay close attention to the major revisions in corporate governance and capital injection rules,among

18、 others.Chapter 1Chinese market must familiarize themselves with the latest changes.In this article,we discuss major changes introduced by Chinas New Company Law,explore the prevailing corporate governance trends,and underscore why these developments matter to foreign investors.Background:Why amend?

19、Understanding the context behind the revision will enable businesses to gain deeper insights into the changes outlined in the New Company Law and discern the trajectory and prevailing trends in Chinas corporate governance landscape.Since its enactment in 1993,Chinas Company Law has undergone two com

20、prehensive revisions and four amendments in the past 30 years.The implementation of the 2018 Company Law saw several practical concerns that needed to be addressed:Qian ZhouManager,China BriefingAuthor China Briefing Issue 203 April 20245 The registered capital subscription system:Although this syst

21、em lowered the threshold for company registration,encouraging entrepreneurship and employment,it also brought forth some problems.Some companies could inflate their registered capital,leading to insufficient actual investment capacity,which affected company operations and the rights of creditors.Non

22、-standardized corporate governance structure:In some companies,the functioning of shareholder meetings,boards of directors,and supervisory boards lacked proper standardization,resulting in low decision-making efficiency.Instances of internal control lapses by certain individuals were also recorded.A

23、dditionally,shareholder rights protection was found to be inadequate,potentially compromising shareholder interests.Issues with equity transfer and debt disposal:During equity transfers,disputes often arose among shareholders,and the exercise of preemptive purchase rights was found to be inappropria

24、te.Regarding debt disposal,some companies increased capital through debt-to-equity swaps,but there were also instances of diverting funds through convertible bonds,harming both the company and creditors.Challenges in legal and regulatory alignment:The implementation of the Company Law alongside othe

25、r legal stipulations posed challenges due to inconsistencies between respective tax laws,intellectual property regulations,and the Company Law.To address these concerns and align with social and economic development goals,the sixth revision of the Company Law was initiated in 2019.After undergoing f

26、our rounds of deliberation and multiple draft amendments,it was ultimately enacted on December 29,2023.The lengthy and iterative process underscores its profound significance.In fact,this particular revision stands out as the most extensive in the history of amendments to Chinas Company Law.Timeline

27、 of Chinas Company Law AmendmentsYearNatureContent1999AmendmentModified rules to implement state-owned enterprise reforms.2004AmendmentAdjusted to facilitate the marketization of share issuance by companies.2005Comprehensive RevisionEncouraged investment in establishing companies and relaxed capital

28、 controls.2013AmendmentFurther eased capital controls in alignment with company registration system reforms.2018AmendmentModified shares repurchase regulations to align with effective capital markets.2023Comprehensive RevisionModified capital injection rules,company organizational structure,sharehol

29、der rights,and other corporate governance issues.China Briefing Issue 203 April 20246Why it matters to new and existing FIE operations?Since January 1,2020,the Foreign Investment Law(FIL)has become a guiding document governing foreign investment.As the FIL came into effect,Article 42 of the FIL simu

30、ltaneously repealed the Law on Wholly Foreign-owned Enterprises(WFOE Law),the Law on Sino-foreign Cooperative Joint Ventures(CJV Law),and the Law on Sino-foreign Equity Joint Ventures(EJV Law).Further,Article 31 of the FIL stipulates that the organizational form,governing structure,and operating rul

31、es of foreign invested enterprises(FIEs)must adhere to provisions of the Company Law,the Partnership Enterprise Law,and other applicable laws,like the treatment of enterprises established by domestic investors.That is to say,the Company Law is the governing law for most foreign invested enterprises(

32、FIEs),considering that the limited liability company(LLC)is the predominant organizational structure chosen by a majority of FIEs,according to the latest data from the Ministry of Commerce.Given the five-year grace period under the FILduring which FIEs established before January 1,2020,can retain th

33、eir original organizational structuresthe application of the New Company Law on FIEs can be divided into two scenarios:FIEs that were established after January 1,2020,or those established before January 1,2020,but already adjusted to the Company Law,must adhere to the provisions of the New Company L

34、aw from July 1,2024.For FIEs that were established before January 1,2020,and havent yet adjusted to the Company Law,the five-year grace period will end on December 31,2024.This means that they will need to adhere to the provisions of the New Company Law from January 1,2025.In either scenario,foreign

35、 investors should thoroughly review the provisions of the New Company Law and launch the adjustment process as early as possible.This is particularly crucial due to the time required for reporting to overseas headquarters and negotiating with domestic partners(in the case of JVs).When needed,seeking

36、 professional assistance is advised,especially for foreign parties who may be unfamiliar with Chinas corporate governance framework.Overview of the changesThe sixth revision of the Company Law(“the sixth revision”)represents a significant advancement over its predecessor,incorporating various improv

37、ements across several fronts.By contextualizing Chinas unique circumstances,First deliberation December 21,2021Second deliberation December 27,2022Third deliberation August 28,2023Fourth deliberation December 29,2023Process of the Sixth Company Law Revision2341 China Briefing Issue 203 April 20247Ke

38、y Changes in Chinas New Company Law*AreaChangesNew chapter on company registration Article 32:Clarifies company registration matters.Article 34:Clarifies that the six registration items listed in Article 32,if not registered or not updated,shall not be used against bona fide counterparties.Capital c

39、ontribution rules Article 47:Limits the maximum period for capital contribution by shareholders of LLCs to five years.Articles 48:Adds that shareholder may make capital contributions in stock rights and creditors rights.Articles 50:Adds that where any shareholder fails to make actual capital contrib

40、utions as prescribed,shareholders at the time of the establishment shall bear joint liability to the extent of the insufficient capital contributions.Article 52:Adds that if a shareholder fails to pay the capital contribution within the prescribed time and subsequent grace period after the establish

41、ment of an LLC,then they can lose the equity of the unpaid capital contribution.Article 54:Requires acceleration of shareholder capital contribution when an LLC is unable to repay maturing debts.Article 88:Adds that the transferor and transferee in equity transfer bear joint liability for the insuff

42、icient capital contribution.Profit distribution Article 54:Shortens the time limit for completing company profit distribution from one year from the date of the distribution agreement to six months.Article 214:Cancels the prohibition of using capital reserve funds to make up for company lossesCapita

43、l reduction Articles 224:Clarifies that proportional reduction applies by default in capital reduction,unless it is otherwise stipulated in legal provisions,the articles of association,or unanimously agreed by all shareholders.Articles 225:Allows companies to offset losses by reducing registered cap

44、ital without actual capital withdrawal by shareholders.Article 226:Specifies legal consequences for illegal capital reduction.Company organizational structure Article 69:Allows companies to establish an audit committee instead of a board of supervisors Article 83:Small LLCs can,with unanimous shareh

45、older consent,opt not to have supervisors.Article 71:Specifies director removal procedures.Articles 59:Introduces“delegated authority”to the board of directors,allowing transfer of some decision-making power(e.g.,making a resolution on the issuance of corporate bonds)from shareholders to the board.A

46、rticles 66:Clarifies the voting rules of the board of shareholders.Article 68:Requires companies having 300 or more employees should include employees representatives in the board of directors unless board of supervisors has been established and includes employees representatives.China Briefing Issu

47、e 203 April 20248Key Changes in Chinas New Company Law*AreaChangesLegal representative Article 10:Expands the scope of legal representatives to include all directors or managers executing company affairs.Articles 10 and 35:Clarifies rules for changing legal representatives.Decision-making rules Arti

48、cle 26:Enhances the time limit for exercising the right to revoke resolutions in lawsuits.Article 27:Introduces rules for resolutions that are not established,in addition to invalid or revocable resolutions.Shareholder rights Articles 57 and 110:Strengthens shareholder information rights,allowing ac

49、cess to accounting records and related materials.Article 189:Allows shareholders to sue the senior management*of wholly owned subsidiaries.Article 23:Establishes a“horizontal disregard of corporate personality”system for companies controlled by the same shareholder.Article 86:Clarifies that the timi

50、ng of equity changes is determined by the entry in the shareholder register.Article 89:Enhances dissenting shareholders buyback rights.Regulation of controlling shareholders,actual controllers,and senior managementCapital maintenance responsibility:Article 51:Adds that directors must demand capital

51、payment from shareholders who fail to contribute.Non-compliant directors are liable for compensation.Article 53:Adds that senior management*are jointly liable with shareholders who divert capital after company establishment.Articles 163,211,and 226:Specify senior managements responsibility for illeg

52、al financial assistance,profit distribution,and capital reduction.Article 180:Clarifies controlling shareholder or actual controller who execute company affairs without being formal directors also assume fiduciary and diligence duties.Defines fiduciary and diligence duties,addressing potential confl

53、icts of interest.Article 192:Clarifies that controlling shareholders or actual controller assume joint liabilities where they instruct a director or senior manager to engage in acts that harm the interests of the company or shareholders.Articles 182 and 185:Strengthen rules on related-party transact

54、ions.Article 191:Introduces directors liability to third parties.Article 193:Allows companies to purchase director liability insurance.Company liquidation system Article 230:Adds a“recovery rule”for voluntary dissolution.Article 232:Clarifies the liquidation obligation of directors.Articles 240 and

55、241:Introduce simplified dissolution and mandatory dissolution procedures.*Key changes in this table pertain specifically to limited liability companies due to space constraints and the publications intended purpose.*Senior management in the table refers to directors,supervisors,and executives.China

56、 Briefing Issue 203 April 20249this revision integrates invaluable insights gleaned from years of judicial practice.Notably,numerous provisions within the updated framework draw inspiration from prior judicial interpretations,particularly in areas concerning company dispute resolution.Additionally,p

57、ractical experiences from the marketsuch as innovation in capital reduction and the inclusion and enhancement of bond management systemshave significantly shaped the revised content.On the other hand,the sixth revision also looks beyond national borders,absorbing beneficial elements from relevant sy

58、stems in other countries and regions.This approach aims to further optimize the China business environment and ensure alignment with international standards,thereby promoting sustained and healthy market development.Furthermore,the sixth revision demonstrates careful coordination with other legal do

59、mains.For instance,the New Company Law aligns with provisions in the Civil Code and Securities Law.These efforts collectively contribute to a comprehensive and forward-looking legal framework for companies in China.The New Company Law has removed 16 articles from the 2018 version and added or modifi

60、ed 228 articles,with around 112 substantial changes.Among others,the most significant changes in the New Company Law are twofold:Capital system reform:The principle of capital adequacy now permeates the entire lifecycle of a company.Corporate governance reform:The shift from shareholder-centric gove

61、rnance to board-centric governance.In addition,the New Company Law respects and encourages rational autonomy within companies,while also providing sufficient legal remedies for company creditors and shareholders.To be more specific,key changes of the New Company Law are summarized in the table below

62、.CORPORATE ESTABLISHMENT AND GOVERNANCEDezan Shira&Associates can advise on the legal incorporation of your investment across multiple Asian countries.This important legal process,when combined with our tax planning services,provides your business with a superior and integrated corporate establishme

63、nt process under one service provider.For more information about our service,please contact .EXPLORE MORERELATED READINGChina Issues Rules on Transition Period for Complying with New Registered Capital RulesChina Briefing Article In order to accommodate companies that are established before the amen

64、ded Company Law comes into effect and have subscribed capital payment terms exceeding the five-year time limit,a three-year transitional period will be implemented.During this period,these companies will be required to gradually adjust the contribution period to meet this requirement.In this article

65、,we introduce the details listed in the draft version of the Provisions on the Registered Capital Registration Management System.READ MORE China Briefing Issue 203 April 202410Considerations for Foreign Stakeholders and FIEsDespite recent economic challenges,many organizations China operations provi

66、de unparalleled access to one of the worlds largest and most competitive global supply chains.Over the past 30 years,a significant number of foreign invested enterprises(FIEs)have been established in China.As of the end of 2022,the number of FIEs operating in China had exceeded 1.12 million.Compared

67、 to their domestic counterparts,FIEs demonstrate greater caution regarding legal revisions and are diligent in making swift adjustments.This stems not only from the closer scrutiny FIEs face from regulatory authorities but also from their commitment to compliance and maintaining a competitive edge.T

68、he New Company Law,as a fundamental regulation overseeing corporate governance in China,introduces significant changes to the legal landscape for FIEs.In this article,we summarize key issues that foreign investors should pay attention to in the New Company Law,explore their potential impact,Chapter

69、2and propose preliminary strategies that can be adopted1.New capital rules and shareholders obligationsArticle 47 of the 2023 Company Law stipulates that shareholders of a Limited Liability Company(LLC)must pay their subscribed capital in full within five years of the companys establishment.This cha

70、nge has been introduced to tackle issues with shareholders over-subscribing capital at the initial stage,as well as very long payment terms,which has sometimes resulted in the subscribed capital never being paid in full.In addition to the five-year contribution term,the New Company Law comprehensive

71、ly strengthens the supervision of shareholders capital contributions.It introduces provisions The New Company Law brings substantial changes with implications for new and existing foreign invested enterprises and stakeholders.Foreign investors must assess if adjustments to existing structures or new

72、 business negotiations are necessary.Qian ZhouManager,China BriefingAuthor1The changes discussed in this article pertain specifically to limited liability companies,as joint-stock companies constitute only 0.3 percent of FIEs,according to recent 2023 data from the Ministry of Commerce.China Briefing

73、 Issue 203 April 202411related to liability of shareholders for defective capital contributions,accelerated capital maturity,supplementary capital contribution obligation by other shareholders at the establishment of the company,and the loss of equity rights for unpaid capital contributions.Clearly,

74、there has been a shift in Chinas corporate regulationsfrom merely encouraging an increase in the number of companies to focusing on attracting mature enterprises and higher quality investments.While the transition from a broad approach to a more refined one may cause short-term challenges,it ultimat

75、ely benefits the companys long-term development.By returning to the original intent of setting registered capital,it not only protects the interests of creditors but also shields shareholders from operational risks of the company.Changes to the Capital Contribution Rule in the New Company LawChanges

76、DescriptionLegal basisFive-year limit for the term of capital contribution The maximum period for capital contribution by shareholders of LLCs is limited to five years,with existing companies subject to transitional arrangements.Article 47 and 266 Shareholder liability for losses caused by insuffici

77、ent or defective capital contributionWhere any shareholder fails to make actual capital contributions as prescribed,he shall be liable for compensation for the losses it causes to the company Article 49 Joint capital contribution liability of other shareholders at the time of the establishment Where

78、 any shareholder fails to make actual capital contributions as prescribed,shareholders at the time of the establishment shall bear joint liability to the extent of the insufficient capital contributions.Article 50Loss of equity rights for unpaid capital contributionIf a shareholder fails to pay the

79、capital contribution within the prescribed time and subsequent grace period after the establishment of an LLC,then they can lose the equity of the unpaid capital contribution.Article 51 and 52Shareholder liability for losses caused by illicit capital withdrawShareholders who illicitly withdraw the c

80、apital contributions shall be liable for compensation for losses it causes to the company.Article 53Acceleration of capital contributionAcceleration of shareholder capital contribution shall apply when an LLC is unable to repay maturing debts.Article 54Joint capital contribution liability between eq

81、uity transferor and equity transfereeThe transferor and transferee in equity transfer bear joint liability for the insufficient capital contribution with limited exceptions.Article 88 China Briefing Issue 203 April 202412Adjustments That Existing Companies Need to Make to Adapt to the New Capital Ru

82、leTypeWho can apply?What to Adjust?No adjustment neededExisting companies whose remaining contribution period for its shareholders is less than five years,counting from July 1,2027 No need to adjust the term of contribution.Voluntary adjustmentExisting companies whose remaining contribution period f

83、or its shareholders exceeds five years counting from July 1,2027 The contribution term must be adjusted during the transition period.The adjusted contribution period cannot exceed five years from July 1,2027,i.e.,the deadline for the contribution payment must be before June 30,2032.Mandatory adjustm

84、entCompanies having a contribution period exceeding 30 years or total subscribed contributions exceeding RMB 10 billion(US$1.4 billion),and based on the official assessment,there are significant anomalies in the contribution period or amount of subscribed capital The company may be required to adjus

85、t the contribution period and amount within six months of the government decision.The adjusted contribution period cannot exceed five years from July 1,2027,i.e.,the deadline for the contribution payment must be before June 30,2032.Implications for existing FIEsIn Chinas foreign investment landscape

86、,while most FIEs exercise commercial prudence in determining registered capitalfactoring in capital expenditures,operational costs,and setting aside surplus fundssome opt for higher registered capital levels to avoid future capital increase procedures.This typically involves lengthy document signing

87、 and registration changes,lasting 1-2 months.Joint ventures(JVs)often impose stricter payment deadlines for registered capital in their articles of association to ensure both parties simultaneous contributions align with operational needs.Conversely,wholly foreign-owned enterprises(WFOEs)tend to fav

88、or flexibility in payment deadlines,often allowing full payment before the companys operational period expires.Given these circumstances,despite the generally stronger capital adequacy among foreign companies compared to domestic entities,many FIEs could be affected by the new capital contribution r

89、ules.As per the draft version of the Provisions on the Registered Capital Registration Management System(draft provisions),existing companies in China will be granted a three-year transition period to comply with the new rules on registered capital.If adopted as is,this transition period will span f

90、rom July 1,2024,to June 30,2027.Under the draft provisions,existing FIEs must adjust their subscribed capital payment terms(contribution period)according to the rules outlined in the table below:Alternately,existing FIEs have the option to decrease their registered capital during the transition peri

91、od,thereby lessening shareholders contribution obligations.If the reduction in registered capital China Briefing Issue 203 April 202413doesnt affect the actual paid-in capital,a simpler process may apply.This process involves publicly announcing the reduction through the National Enterprise Credit I

92、nformation Publicity System for a 20-day period,subject to meeting specific conditions.Moreover,FIEs can opt to transfer a portion of their equity and bring in new shareholders.This option becomes pertinent if existing shareholders encounter difficulties in paying the subscribed capital within the r

93、evised contribution period,yet they prefer not to decrease the registered capital due to various reasons.However,in practice,foreign investors may not base their equity transfer decisions solely on the new capital requirements.Both WFOEs and JVs exercise caution when considering new partners,taking

94、into account various factors beyond the capital regulations.Implications for new foreign investmentIn light of the heightened emphasis and scrutiny on shareholders capital contribution obligations,new foreign investors must exercise heightened caution when deciding on their initial registered capita

95、l.On the one hand,they must ensure adequate reserve capital to meet ongoing operational requirements.On the other hand,they should avoid setting excessively high registered capital amounts to prevent surplus and mitigate the risk of being unable to fulfill capital obligations.If funding needs are un

96、certain,foreign investors can address them through future capital increases.Given the joint liability shared by shareholders who havent fully paid their subscribed capital within the specified period and other shareholders at the time of establishment,its vital for foreign investors to establish eff

97、ective mechanisms in joint venture contracts,shareholder agreements,and articles of association.These mechanisms ensure that all shareholders synchronize their capital contributions and prevent compliant shareholders from being implicated by defaulting ones.In terms of mergers and acquisitions(M&A),

98、the joint liability associated with insufficient capital contribution borne by the transferor and transferee means that foreign investors selling their unpaid-in equity can no longer simply transfer the capital contribution obligation to the buyer.Similarly,foreign investor buyers must carefully ass

99、ess the actual payment status of the target companys registered capital.This diligence goes beyond ensuring compliance with the articles of association and should involve requesting the counterparty to complete payment of any outstanding portion of registered capital before finalizing the transactio

100、n.Changes to the corporate governance structureThe New Company Law introduces significant adjustments to the regulation of corporate governance structures.Specifically for LLCs,it offers shareholders considerable flexibility in selecting the companys governance framework.Supervisor(s)One of the majo

101、r changes in the New Company Law is the provision to allow LLCs to establish an“audit committee”within the board of directors,in which case it would not need to establish a board of supervisors(or appoint any supervisors).The audit committee can be“composed of directors on the board of directors and

102、 exercise the powers of the board of supervisors”.Meanwhile,Article 83 specifies that small-scale LLCs or those with a limited number of shareholders can appoint a single supervisor.And with unanimous shareholder consent,they can forgo appointing a supervisor altogether.China Briefing Issue 203 Apri

103、l 202414To put it simply,an LLC can forgo establishing a board of supervisors or appointing individual supervisors if it either creates an audit committee within its board of directors or gains unanimous consent from its shareholders.That said,should an FIE eliminate the board of supervisors or indi

104、vidual supervisors completely?Over time,supervisors have been tasked with overseeing both the board of directors and executive management.However,their role can become largely ceremonial as their appointment and funding are often controlled by major shareholders.For WFOEs,supervisor appointments may

105、 primarily serve registration requirements without substantial supervisory responsibilities.While the authority of supervisors remains largely unchanged under the New Company Law,their duties and responsibilities have significantly increased(more details in the later sections).Eliminating supervisor

106、s may align better with the needs of most WFOEs.However,for JVs the case is different.Since the appointment of supervisors often facilitates JV partners in controlling the company and safeguarding their interests,its less likely that JVs will entirely eliminate supervisors.Nevertheless,there is anot

107、her issue that foreign investors should pay attention to.Under the existing Company Law,small LLCs have the option to appoint one to two supervisors instead of establishing a board of directors.In the case of JVs,its common for practical considerations to lead to the appointment of two supervisors,w

108、ith each side(Chinese and foreign shareholders)appointing one supervisor.However,Article 83 of the New Company Law explicitly eliminates the option of having two supervisors.Consequently,existing JVs may need further clarification on whether they can retain the two-supervisor structure without estab

109、lishing a board of directors.If such JVs are obligated to strictly adhere to the provisions of the New Company Law and opt to set up a board of supervisors,they may need to appoint at least four supervisors to maintain the principle of parity,with each side appointing two supervisors.This would add

110、complexity and increase personnel costs to the governance structure.Then,should FIEs replace the supervisor(s)with an audit committee?Our answer is negativewe recommend FIEs refrain from setting up an audit committee for the moment.The primary reason is that the New Company Law lacks clear provision

111、s regarding the audit committees deliberation methods and voting procedures.Without well-defined mechanisms and practical experience,achieving internal coordination between the executive functions of the board of directors and the supervisory role of the audit committee may pose significant challeng

112、es.Consequently,the audit committee might still struggle to fully fulfill its supervisory function.Finally,can FIEs opt to neither establish an audit committee nor appoint supervisor(s)?Although the New Company Law does not explicitly define“small-scale LLCs”or“LLCs with a limited number of sharehol

113、ders”,FIEs should meet the conditions,considering that they are typically wholly owned companies or JVs established by few shareholders.Depending on the future practices of company registration authorities,we believe it is feasible for FIEs to neither establish a supervisory board nor set up an audi

114、t committee under the board of directors.China Briefing Issue 203 April 202415Employee directorsAnother significant change in corporate governance is that the New Company Law strengthens democratic management of the company and adjusts the requirements for appointing employee directors.In contrast t

115、o the existing Company Law,which requires only companies with State-owned capital to have employee directors,the New Company Law mandates that LLCs with more than 300 employees must include employee representatives on their board of directors,unless the company has already established a board of sup

116、ervisors and there are employee representatives in it.Given that the New Company Law stipulates that the board of supervisors must include a certain proportion of employee representatives,an FIE will not need to appoint employee directors if it has already established a board of supervisors.This is

117、because all boards of supervisors should inherently include employee representatives by default.For FIEs,introducing employee directors may raise some concerns among shareholders.While having employee representatives participate in decisions related to employee interests can help reflect and safegua

118、rd those interests,the majority of board decisions are not directly tied to employee matters.The qualifications and abilities of employee directors to make rational decisions,as well as their ability to maintain confidentiality,need to be tested in practice.Consequently,as a short-term strategy,FIEs

119、 can consider having executives with employee status(such as managers)concurrently serve as employee directors or supervisors,and in doing so avoid substantial changes to the boards structure.Future clarifications are needed on how the employee director mechanism works in practice.Power division amo

120、ng shareholders,directors,and executivesThe New Company Law grants greater flexibility in the allocation of powers among shareholders meetings,boards of directors,and executives.Notably,the statutory powers of shareholders meetings have been somewhat reduced.Matters that were previously reserved for

121、 shareholders meetings,such as decisions on the companys business policies and investment plans,now fall within the purview of the board of directors under the New Company Law.Additionally,beyond the enumerated scope of board of directors powers,shareholders meetings can explicitly grant additional

122、authority to the board of directors.For instance,shareholders meetings may authorize the board of directors to make decisions regarding the issuance of corporate bonds(Article 59).Simultaneously,the new law eliminates the specific listing of managerial powers found in the existing Company Law.Manage

123、rial authority is now entirely subject to the companys articles of association and the agreements of the board of directors(Article 74).For foreign investors,this adjustment holds particular significance.In practice,overseas shareholders of FIEs face challenges in closely monitoring and making decis

124、ions about the daily operations of domestic companies.Furthermore,many foreign companies adhere to a board-centric governance model,where the board of directors is responsible for operational and investment decisions,while corporate executives handle day-to-day operations.This change in power alloca

125、tion aligns better with the operational habits of foreign China Briefing Issue 203 April 202416investors,allowing them to optimize governance structures based on their specific circumstances and enhance management efficiency.Rules of procedures for decision-makingThe New Company Law has adjusted the

126、 rules of procedures for shareholder meetings and board meetings of LLCs.Some of the existing rules applicable only to joint-stock companies now extend to limited liability companies.These include:Shareholder meeting resolutions must be approved by shareholders representing more than half of the vot

127、ing rights(Article 66).Board meetings must have a majority of directors present to be held.Board resolutions require the agreement of more than half of all directors(Article 73).If the number of attendees is insufficient or the number of people agreeing to a resolution does not meet the requirements

128、 of the New Company Law or the companys articles of association,the resolutions of the shareholder meeting or board meeting are not valid(Article 27).Under the existing Company Law,there are few restrictions on the rules and voting procedures for LLCs.Enterprises enjoy significant flexibility to mut

129、ually agree upon procedural rules.To prevent decision-making delays caused by inadequate attendance,some companiesexcept for matters mandating approval by two-thirds or more of all voting rights shareholdersmay specify that decisions are valid based on the actual number of attendees.This could be un

130、animous,an absolute majority,or a simple majority.Furthermore,if a shareholder or director consistently fails to attend meetings or voice opinions after receiving notices,the companys articles of association may stipulate that the actual number of attendees constitutes the statutory quorum for speci

131、fic meetings.Given that the New Company Law has clearly defined voting mechanisms and statutory meeting attendance requirements for LLCs,the feasibility of the above mechanisms will be challenged.Efficient and stable business operations for FIEs heavily rely on the successful passage of shareholder

132、and board resolutions.FIEs should reevaluate their existing meeting rules,assess potential risks,and take preliminary measures.For instance,FIEs can consider setting up replacement mechanisms for directors who are frequently absent,to avoid decision-making delays caused by failure to meet the statut

133、ory number of directors in board meetings.Dismissal of directorsArticle 71 of the New Company Law stipulates that if a shareholder meeting unreasonably removes a director before their term expires,the director may request compensation from the company.This provision diverges from the long-standing p

134、erception held by foreign shareholders.Foreign investors generally believe that shareholders have the authority to arbitrarily remove directors they nominate without cause,as this reflects their shareholder rights.Considering the implementation of the director compensation system under the New Compa

135、ny Law,whether for WFOEs or JVs,prudent evaluation is essential when removing directors before their term expires.Companies are advised to confirm in writing with the director that there are no unresolved disputes or compensation matters between them and the company.This proactive step helps prevent

136、 potential disagreements with departing directors in this context.China Briefing Issue 203 April 202417Senior management dutiesThe personal liability of directors,supervisors,and executives(“senior management”)have always been a hot topic for foreign investors.Executives here refers to managers,depu

137、ty managers,chief financial officers,the company secretary of a listed company,and other individuals specified in the companys articles of association.The strengthened fiduciary duty and diligence obligation of senior management personnel,as well as their liability towards the company and third part

138、ies is another focus of the New Company Law.Specifically,the New Company Law clarifies the duty of senior management personnel in the following aspects:It establishes principles and standards for the fiduciary duty and diligence obligations of senior management;includes supervisors and“close relativ

139、es of directors and supervisors,as well as enterprises directly or indirectly controlled by them”in the scope of regulation for related-party transactions and industry competition(Article 180).If senior management personnel cause harm to others while performing their duties,the directors share bear

140、compensation liability responsibility together with the company,where they act intentionally or with gross negligence(Article 191).It reinforces the obligation of senior management personnel to independently comply with their duties.If they engage in actions harmful to the company or shareholders ba

141、sed on instructions from controlling shareholders or actual controllers,they will be jointly liable(Article 192).It emphasizes the duty of senior management personnel to maintain the companys capital adequacy.Directors and supervisors who fail to fulfill their responsibilities will be jointly liable

142、 or subject to compensation liability(Article 51,53,163,211,and 226).It clarifies the duty of directors as liquidators of the company and the compensation liability for failure to perform such duties(Article 232).In this context,senior management personnel need to fulfill their statutory duties and

143、obligations actively and comprehensively.This shift is expected to impact the personnel arrangements and workflow of many FIEs.Generally,within the current management structure of foreign companies,senior management personnel are simultaneously bound by their fiduciary duties to the company and the

144、management system and constraints within the entire group.While alignment is often feasible,conflicts may arise in certain situations.For example,consider a foreign-nominated director within the company who approved a significant investment based on instructions from the overseas headquarters.If tha

145、t investment fails and causes losses to the company,scrutiny will focus on whether these directors appropriately fulfilled their fiduciary and diligence obligations.Moreover,in many FIEs,some senior management personnel,especially those affiliated with the headquarters and based overseas,may not sub

146、stantially participate in the companys operations and decision-making due to practical constraints.This is no longer suitable under the New Company Law.We recommend appointing individuals familiar with the companys business and deeply involved in actual operations as senior management personnel to m

147、itigate the risks associated with failing to meet the fiduciary and diligence standards under the new law.China Briefing Issue 203 April 202418Equity transferArticle 84 of the New Company Law introduces two significant changes regarding equity transfers:Removal of consent requirement:Previously,when

148、 a shareholder transferred shares to an external party,other existing shareholders had the right to consent or object.Now,under the New Company Law,if other shareholders receive written notice of the share transfer and do not respond,it is deemed that they have waived their pre-emptive purchase righ

149、ts.Clarification of“same conditions”for the pre-emptive purchase rights:The New Company Law now explicitly defines same conditions as details such as quantity,price,payment method,and deadline specified in the share transfer notice.This legal refinement enhances the implementation process of pre-emp

150、tive purchase rights.As mentioned earlier,FIEs especially JVs tends to exercise caution when introducing new partners.In many cases,foreign companies establish JVs with domestic enterprises based on business cooperation needs.Such partnerships resemble a“marriage”between two entities.The changed pro

151、visions on equity transfer,according to which a shareholder can directly transfer their shares without the other partys consent,may disrupt the stability of the“marriage”.Particularly,when foreign companies are minority shareholders,sudden departures by majority shareholders can leave the remaining

152、minority shareholders in an awkward position.They may lack the resources to acquire the majority shareholders shares and end up having to deal with completely unfamiliar new shareholders.Fortunately,Article 84 of the New Company Law provides an exception if the companys articles of association stipu

153、late otherwise regarding share transfers,those provisions shall prevail.Therefore,to maintain stability in the cooperative relationship between both parties,parties of the JV are highly recommended to stipulate equity transfer restrictions in the JV agreement and articles of associations.Non-proport

154、ional capital reductionArticle 224 of the New Company clarifies that when a company reduces its registered capital,the corresponding reduction in the contribution amount or shares should be made according to the proportion of shareholders contributions or holdings.That is to say,proportional capital

155、 reduction is the principle.Exceptions are made in the following cases:where the law stipulates otherwise;if there are specific agreements among all shareholders of an LLC;or the articles of association of a joint-stock company specify otherwise.Non-proportional capital reduction,or targeted capital

156、 reduction is not a common practice for FIEs.It is usually applied in some equity investment projects,where investors require the company buy back its equity under certain circumstances.However,under the New Company Law,foreign investors may view targeted capital reduction as a viable method for a s

157、hareholder to exit the company,given that the new law explicitly permits targeted capital reduction based on unanimous shareholder consent.To ensure the effectiveness of this withdrawal mechanism,a clear and detailed agreement outlining the conditions of targeted capital reduction should be establis

158、hed,confirmed,and signed by all shareholders.China Briefing Issue 203 April 202419BUSINESS ADVISORY SERVICESBusiness Advisory teams are experts within their fields and have helped thousands of international clients navigate Asias business and regulatory landscapes.We work with clients to address spe

159、cific issues and projects,as well as within multi-disciplinary advisory taskforce models alongside our in-house tax,audit,HR,and technology teams.If you need assistance in aligning your business with the New Company Law or any other advisories,please contact .EXPLORE MOREKey takeawaysOverall,the New

160、 Company Law introduces significant revisions,with a focus on optimizing corporate governance structures,strengthening shareholders responsibilities regarding capital contributions,and enhancing the duties of directors,supervisors,and executives.These changes will have a substantial impact on variou

161、s types of companies,including FIEs.For FIEs,regardless of whether they have already adjusted their organizational structure according to the existing Company Law,it is crucial to consider the implications of the revisions introduced in the New Company Law.Understanding how the new law aligns with o

162、r differs from the existing one is essential.Specifically,attention should be given to whether the new law merely triggers technical adjustments to relevant organizational documents or if it necessitates substantial changes to existing business arrangements(such as board member structures or capital

163、 arrangements).In the latter case,FIEs may need to engage in new business negotiations with partners promptly.Furthermore,FIEs affected by changes introduced by the New Company Law,such as the 5-year capital contribution requirements or employee director mandates,should diligently track supplementar

164、y clarifications issued by regulatory authorities.This monitoring is particularly important with regards to the transition of requirements from old to new laws for existing companies.How to Prepare for the New Company Law?Understand the new provisions introduced in the New Company Law.Reviewing exis

165、ting corporate structures.Reviewing corporate documents and identify areas that need adjustments.Evaluate the implications of the changes from multiple perspectives and consider them when making business decisions,such as when considering equity transfer.Monitor future developments for areas needing

166、 further clarifications.Provide necessary training to relevant personnel such as shareholders and directors.Seek legal counsel and expert advice when necessary.In summary,the New Company Law significantly modifies Chinas corporate governance landscape and has broad implications for foreign investors

167、 and FIEs across various aspects.Businesses are advised to stay informed about the latest legal requirements and subsequent clarifications issued by regulatory authorities.Assessing the urgency and complexity of necessary adjustments based on their specific circumstances is essential.When necessary,

168、seeking assistance from external legal service teams is advisable.China Briefing Issue 203 April 202420Tax Implications Under the New Company LawUnder the New Company Law,companies and stakeholders face new tax implications.Ahead of its implementation,thorough understanding,staying informed,and cons

169、ulting legal and tax experts are essential for proactive risk management.Chapter 3Qian ZhouManager,China BriefingAuthorAgainst the backdrop of the New Company Law,companies,shareholders,and creditors will face new tax implications.Before committing capital to a new company,deciding the contribution

170、form,deciding to buy or sell the equity in a company,or planning to reduce capital for making up losses,companies and individual investors are advised to carefully consider the corresponding tax implications and adopt a cautious yet proactive approach for tax planning and financial strategy developm

171、ent.Five-year subscribed capital payment term and relevant tax implicationsArticle 47 of the New Company Law stipulates that shareholders of a Limited Liability Company(LLC)must fully pay their subscribed capital within five years from the companys establishment.This five-year contribution term appl

172、ies not only to new companies but also to existing companies established before the New Company Law takes effect on July 1,2024.For the latter,it is necessary to adjust their contribution term to align with the new five-year requirement during the transition period.Pre-tax deduction of interest expe

173、nseAccording to Article 38 of the Implementation Regulations for the Corporate Income Tax Law(CIT Regulation),the following interest expenditure incurred by an enterprise in production and business activities shall be deductible:Interest expenditure for borrowings made by a non-financial enterprise

174、from a financial enterprise;Interest expenditure for approved bonds issued by an enterprise;and Interest expenditure for borrowings made by a non-financial enterprise from a non-financial enterprise which does not exceed the amount computed according to the interest rate for same type of loans of a

175、financial enterprise during the same period.China Briefing Issue 203 April 202421In accordance with these provisions,the interest expenses related to a companys external loans are eligible for pre-tax deduction.However,the Reply of the State Taxation Administration on Pre-tax Deduction of Interest E

176、xpenses Incurred on Unpaid Investments by Enterprise Investors(Guo Shui Han 2009 No.312)imposes certain limitations on this tax treatment.As per Guo Shui Han 2009 No.312,if an investor fails to pay the payable capital amount within the specified period,the interest incurred from external borrowingse

177、quivalent to the interest payable on the difference between the actual paid-up capital and the capital amount due within the stipulated periodshall not be considered a reasonable expenditure for the enterprise.Thus,this interest burden shall be borne by the investors and cannot be deducted when calc

178、ulating the taxable income of the enterprise.The term“specified period”generally refers to the capital contribution timeframe specified in the articles of association.Under the existing Company Law,there is no specific time limit for capital contributions,leading many enterprises to set lengthy cont

179、ribution terms.In such cases,triggering the pre-tax deduction restriction on loan interest becomes less likely.However,with the introduction of the 5-year contribution term requirement in the New Company Law,it has become easier to activate the loan interest deduction restrictions.Therefore,we recom

180、mend that LLCs with a substantial amount of outstanding unpaid capital exercise vigilance when obtaining external loans.It is advisable to proactively engage with competent tax authorities to clarify the applicable tax treatment,accurately calculate the pre-tax deduction for interest expenses,and fu

181、lfill enterprise income tax obligations.Additionally,Article 49 of the New Company Law states that shareholders who fail to timely pay their capital contribution in full must not only settle the full amount owed to the company but also assume liability for any resulting losses incurred by the compan

182、y.If the corresponding interest cannot be deducted before tax due to the shareholders unpaid contribution,the company is entitled to request the shareholder to bear this tax loss.Potential tax on capital reduction.Under the context of the New Company Law,many companies may opt to reduce their regist

183、ered capital to lower the required paid-in capital.Reducing capital may trigger income tax liabilities.Taking the company shareholders as an example,according to the State Taxation Administration Announcement 2011 No.34,the assets obtained by an investing enterprise through capital reduction can be

184、divided into three categories:Investment cost recovery:This corresponds to the portion of assets acquired by the investing enterprise from the invested enterprise,equivalent to the initial capital contribution.Dividend income:Equivalent to the proportion of undistributed profits and accumulated surp

185、lus reserves of the invested enterprise,calculated based on the reduction in paid-in capital.Income from investment asset transfer:The remaining portion.Among the three categories,only the portion related to income from investment asset transfer is subject to CIT payment.Under the New Company Law,wh

186、en companies decrease their registered capital to lower paid-in capital,shareholders may not receive income from investment asset transfers due to the capital China Briefing Issue 203 April 202422Tax Analysis of Capital Contribution in the Form of Equity RightsIncome taxValue-added tax(VAT)Individua

187、l shareholders Pay individual income tax(IIT)based on“income from property transfer”.Eligible individuals can pay IIT in installments over 5 years.Capital contribution by equity of an unlisted company is not subject to VAT.Capital contribution by shares of listed company is subject to VAT at the rat

188、e of 6%.Individual shareholders might be exempt from VAT for capital contribution in the shares of listed companies.Corporate shareholders The capital contribution shall be treated as sales revenue,subjecting to CIT.Eligible entities can pay in installments over 5 years.Income may not be recognized

189、under special tax treatment.reduction,thus avoiding CIT payment.However,if a company has significant net assets and retained earnings,shareholders reducing capital without receiving investment income may face scrutiny from the tax bureau.Tax implication of non-monetary contributionsArticle 48 of the

190、 New Company Law adds that a shareholder may make capital contributions in equity rights and creditors rights,in addition to the previously forms.Equity and debt investments both fall under the category of non-monetary contributions,which often involve complex tax implications.Taking equity investme

191、nt as an example,the primary tax analysis is summarized in the following table:Moreover,when transferring assets like equity and creditors rights,it may entail debt restructuring between enterprises,leading to complex tax treatment.Additionally,capital contribution in non-monetary assets may qualify

192、 for specific preferential tax treatment.Given these,evaluating the tax burden associated with non-monetary contributions is complicated,with tax implications differing greatly depending on the nature of the non-monetary investment.Therefore,we highly recommend that both companies and individuals th

193、oroughly assess potential tax burdens beforehand when making non-monetary asset contributions.Recognizing these tax implications as crucial elements in investment costs is imperative.Potential tax implications for equity transferArticle 88 of the New Company Law adds that the transferor and transfer

194、ee in equity transfer bear joint liability for the insufficient capital contribution,unless the transferee is not aware and ought not to know that the transferor fails to make capital contribution as prescribed or the non-monetary property used as capital contribution is defective.In this context,th

195、e obligation of the transferee to assume the contributions for the transferor should be factored into the consideration for the equity transfer when calculating capital gains,and corresponding IIT or CIT should be paid consequently.China Briefing Issue 203 April 202423Profit distribution and relevan

196、t tax implicationsArticle 212 of the New Company Law addresses the statutory deadline for profit distribution.It mandates that company boards must distribute profits within six months from the date when shareholders meetings pass profit distribution resolutions.The amendment aims to reduce the time

197、gap between resolution and actual profit distribution within companies.However,does this acceleration imply a faster tax obligation for shareholders dividend income?For resident enterprise shareholders,in many cases,the dividend income they receive from invested resident enterprises can enjoy CIT ex

198、emption.Even if dividend income is subject to CIT,Guo Shui Han 2010 No.79 specifies that income from equity investments in the form of dividends or bonuses should be determined based on the date when the invested enterprises shareholders meeting makes profit distribution decisions.Therefore,the timi

199、ng of tax obligations for resident enterprise shareholders regarding dividend income remains unaffected.Nevertheless,for non-resident enterprise shareholders and individual shareholders,their dividend income tax is generally withheld at the source during payment.This means that the invested enterpri

200、se deducts and withholds taxes when distributing dividends.Consequently,early profit distribution may impact the tax-related arrangements for the invested enterprise.Companies with such shareholders should not only promptly carry out profit distribution within the statutory period but also prepare f

201、or relevant tax-related work to ensure timely and compliant tax withholding declarations.Key takeawaysAs the effective date of implementation of the New Company Law approaches,relevant entities must consider not only the various changes introduced by the new law but also the potential tax implicatio

202、ns when undertaking actions,such as company establishment,capital contribution,equity transfer,profit distribution,and loss compensation.The recent revision of the Company Law encompasses all stages of a companys life cycle,from registration to dissolution and liquidation.The tax implications associ

203、ated with these changes extend well beyond the scope of this article.We recommend that relevant entities thoroughly study the New Company Law,stay informed about subsequent legal regulations,and assess the comprehensive impact of the new law on their investment and business planning.When necessary,b

204、usinesses can also maintain communication with legal and tax specialists to proactively address potential business and tax risks.TAX ADVISORYDezan Shira&Associates tax professionals have a deep understanding of Asias complex tax environments,as well as in-depth industry knowledge and experience.Our

205、experienced team of tax accountants,lawyers,and ex-tax officials can help on a wide spectrum of tax service areas across all major industries.For more information on our tax services,please contact .EXPLORE MOREScan this QR codeVisit our mobile page andget the latest updates investors news and resou

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