{"id":10598,"date":"2024-05-03T18:01:25","date_gmt":"2024-05-03T15:01:25","guid":{"rendered":"https:\/\/ch.jfdi.cc\/?p=10598"},"modified":"2024-05-03T18:01:25","modified_gmt":"2024-05-03T15:01:25","slug":"three-major-amendments-to-new-company-law-in-taxation","status":"publish","type":"post","link":"https:\/\/ch.jfdi.cc\/?p=10598","title":{"rendered":"Three major amendments to new Company Law in taxation"},"content":{"rendered":"

A <\/span>revision of the new Company Law was adopted on 29 December 2023 at the 14th National People\u2019s Congress, and will come into effect on 1 July 2024. This revision will certainly have a knock-on effect on the tax treatment of company business and investment, affecting their tax costs.<\/span>
\nThis article analyses the amendments with a tax impact on companies, providing ideas for the standardisation of company compliance governance and tax management systems.
\nNew provisions on the horizontal corporate personality denial system.<\/span> <\/strong>Article 23 of the new Company Law introduces the horizontal corporate personality denial system, holding shareholders accountable for the actions of other controlled companies.
\nIn practice, companies and investors that use multiple shell companies for related-party transactions to shift profits and evade taxes \u2013 or stop production and operation and restart operations under new entities after declaring bankruptcy and liquidation to evade tax obligations \u2013 will be subject to restriction and crackdown.<\/p>\n

Wu Jiayu<\/strong>
Associate
Blossom & Credit Law Firm<\/figcaption><\/figure>\n

After implementation of the new Company Law, tax authorities are empowered to hold other controlled companies accountable under specific circumstances where the shareholders exert control.
\nTherefore, investors should not assume that companies are always independent of each other, and accordingly try to evade taxes through illegal operations between companies under their control. Also, companies involved in the above-mentioned situations should note that if they are deemed \u201crelated enterprises\u201d under tax law \u2013 and \u201cnot in line with the principle of independent transactions\u201d, which reduced taxable income or amount via transactions between related companies \u2013 special tax adjustments will apply.
\nLimited duration capital contribution system reforms.<\/span> <\/strong>The new Company Law sets a five-year capital contribution period to replace the previous \u201czero contribution\u201d, requiring companies to complete capital contributions within the specified period.
\nFailure to meet the deadline may lead companies to resort to methods such as equity transfer or capital reduction to meet legal requirements.
\nThe new five-year deadline for capital contribution has two main impacts on company taxation:<\/p>\n

    \n
  1. Failure to meet the deadline may restrict pre-tax interest deductions for corporate income tax; and<\/li>\n
  2. Resulting capital reduction, equity transfer, etc., will increase the tax burden.<\/li>\n<\/ol>\n
    Li Tong<\/strong>
    Associate
    Blossom & Credit Law Firm<\/figcaption><\/figure>\n

    Expenses eligible for pre-tax deduction by enterprises should be reasonable and categorised as regular expenditures in production and operation. If shareholders of a company have not completed the contribution of registered capital, the interest paid by the company on borrowings (within the amount of unpaid capital) is not a reasonable expense and should not be borne by the company. It should not be deducted when calculating the company\u2019s taxable income.
    \nAdditionally, the reduction of registered capital of the company will further affect the amount of pre-tax deductions for the portion of interest expenses on related debt in corporate income tax.
    \nIf a company elects to reduce its capital and reserve retained earnings, the shareholders may possibly recover more than the initial cost of their investment pursuant to the corresponding rules for the distribution of earnings stated in the articles of association and shareholders\u2019 agreement.
    \nIn this case, corporate shareholders are required to pay corporate income tax on the portion of income derived from the transfer of investment assets, and individual shareholders are required to pay individual income tax on income derived from the capital reduction.
    \nIf a company chooses equity transfer, it should consider distinguishing between the individual income tax on the transfer of equity and dividends and bonuses received, ensuring compliance with corresponding withholding obligations.
    \nFor the equity transfer price, attention should be paid to the method of recognising the income from equity transfer. Cases where the price is obviously low may face the risk of adjustment by tax authorities.
    \nCapital contribution with equity and creditor\u2019s rights \u2013 tax burden on non-monetary contribution.<\/span> <\/strong>Article 48 adds provisions of capital contribution with equity and creditor\u2019s rights. For tax burden and impact, a company should note that when a company invests with equity and creditor\u2019s rights, it should be subject to fair value assessment. This means adjusting and paying the corporate income tax year by year based on the fair value of equity and creditor\u2019s rights at that time, minus the cost of acquiring equity and creditor\u2019s rights and adding annual investment income from the transfer of equity and creditor\u2019s rights.
    \nThe company may also enjoy the policy of deferred taxation within five years. However, if the equity or creditor\u2019s rights are transferred or recovered within five years, the company will no longer enjoy the policy and become subject to a one-time payment of corporate income tax.
    \nFor an investee acquiring equity or creditor\u2019s rights as an asset, tax should be calculated based on the current fair value of the acquired equity, or creditor\u2019s rights without the year-to-year adjustment. If an investee acquires equity in other companies by investment and meets the conditions for company reorganisation under the tax law, a special tax treatment policy should apply to avoid overpayment of the corresponding tax.
    \nInvestment with equity or creditor\u2019s rights by individual shareholders is a simultaneous occurrence of non-monetary assets transfer and investment. Taxable income should be calculated based on the assessed fair value of the equity or debt transfer income minus the acquisition cost and reasonable taxes and fees.
    \nThe individual income tax should be calculated and paid based on \u201cincome from transfer of property\u201d. If a taxpayer has difficulties in paying tax in one lump sum, the taxpayer may formulate a reasonable payment plan, report it to the competent tax authorities, and pay the tax in instalments within five years of the taxable date.
    \nRevision of the new Company Law has many effects on companies, investors and shareholders at the tax level, reflecting the adjustment and revision of tax laws and regulations in the future.
    \nCompanies should pay more attention to construction of their own financial and tax management systems, improve compliance governance and awareness of paying tax legally, and prevent taxation risks. Otherwise, they will not only be subject to recovery of tax payable, overdue tax payment penalties, fines and other administrative penalties, but may also face more serious risks of criminal liability.
    \nWu <\/span>Jiayu<\/span> and Li Tong are associates at Blossom & Credit Law Firm<\/span><\/span> <\/span><\/strong><\/em><\/span><\/p>\n

    \n12\/F, 15\/F, Tower A, Xinzhongguan Building
    No.19, Zhongguancun Street, Haidian District
    Beijing 100086, China
    Tel: +86 10 8287 0263
    Fax: +86 10 8287 0299
    E-mail: wujiayu@baclaw.cn
    litong@baclaw.cn
    www.bastionlaw.com
    \n<\/section>\n","protected":false},"excerpt":{"rendered":"

    The new Company Law revision introduces a horizontal corporate personality denial system, holding shareholders accountable for the actions of other controlled companies. This will impact tax treatment for companies engaging in related-party transactions to evade taxes.<\/p>\n","protected":false},"author":6,"featured_media":10599,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"Default","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[7817,3038,5936,2590,7667,8575,7443,186,33,8809,1776,5732,6196,1625,3681,2511,8099,5559,1381,898,3978,641,3935,3644,2544,1594,4081,4823,7905,2294,3398,1823,899,2753,3404,5679,3903,7806,185,6653,5211,4371,5328,2946,4833,5838,284,5115,3255,4428,4620,8325,8807,1812,4054,1065,6917,4598,6006,6546,8808,4738,1183,4861,444],"class_list":["post-10598","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-other","tag-acquisition","tag-agreement","tag-article","tag-article-23","tag-assessment","tag-authorities","tag-awareness","tag-business","tag-companies","tag-company-compliance-governance","tag-compliance","tag-conditions","tag-congress","tag-construction","tag-corporate-income-tax","tag-costs","tag-credit","tag-creditor","tag-deadline","tag-debt","tag-denial","tag-earnings","tag-expenditures","tag-expenses","tag-fees","tag-fines","tag-future","tag-governance","tag-impact","tag-income","tag-income-tax","tag-increase","tag-interest","tag-investment","tag-investors","tag-law","tag-law-firm","tag-liquidation","tag-main","tag-management","tag-one-time-payment","tag-operation","tag-party","tag-penalties","tag-policy","tag-price","tag-property","tag-recovery","tag-reforms","tag-regulations","tag-report","tag-retained-earnings","tag-revision-of-company-law","tag-rights","tag-risk","tag-tax","tag-tax-burden","tag-tax-deductions","tag-tax-obligations","tag-tax-payment","tag-tax-treatment","tag-taxation","tag-taxes","tag-treatment","tag-zero"],"acf":{"keyphrase":"","keywords":"","sourceimg":"","country-category":""},"yoast_head":"\nThree 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