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Navigating New Tax Implications Under China's New Company Law

With the introduction of the New Company Law, companies, shareholders, and creditors in China will encounter new tax implications. This guide delves into the key areas affected and provides strategic insights for navigating these changes.

Five-Year Subscribed Capital Payment Term

Article 47 of the New Company Law mandates that shareholders of Limited Liability Companies (LLCs) must fully pay their subscribed capital within five years from the company’s establishment. This applies to both new and existing companies, necessitating an adjustment during the transition period.

Pre-Tax Deduction of Interest Expense

Per Article 38 of the CIT Regulation, interest expenses on borrowings are deductible, but Guo Shui Han [2009] No. 312 limits this benefit if capital payments are overdue. Companies must be cautious with external loans and consult tax authorities to clarify pre-tax deductions.

Implications of Non-Monetary Contributions

Article 48 permits capital contributions in equity and creditor’s rights, which involve complex tax implications. Companies should evaluate the tax burden of non-monetary contributions, as these are crucial elements of investment costs.

Tax Considerations for Equity Transfer

Article 88 holds both transferor and transferee jointly liable for insufficient capital contributions. This joint liability must be factored into equity transfer agreements, impacting Individual Income Tax (IIT) or Corporate Income Tax (CIT) calculations.

Profit Distribution and Tax Implications

Article 212 mandates profit distribution within six months of a shareholders' meeting resolution. For resident enterprise shareholders, dividend income is often CIT-exempt, while non-resident and individual shareholders face source-withheld taxes.

The New Company Law introduces significant changes impacting various business stages, from establishment to liquidation. Companies must study the new regulations, assess tax implications, and engage with legal and tax experts to mitigate risks and optimize financial strategies.

Key Takeaways

  • Understand the five-year capital payment term and its tax impact.

  • Recognize limitations on pre-tax deductions for overdue capital.

  • Evaluate tax burdens of non-monetary contributions.

  • Factor joint liability into equity transfer agreements.

  • Prepare for accelerated profit distribution and related tax obligations.

Can Woodburn help you?

 

Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.


Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.

 

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