The amendment of the Company Law of the People's Republic of China represents a pivotal shift in the regulatory landscape governing corporate governance and business operations within China. This legislation, set to take effect on July 1, 2024, introduces sweeping reforms across various facets of corporate law, encompassing capitalization requirements, equity transfer regulations, corporate governance structures, employee representation, shareholder rights and protections, as well as streamlined policies for company setup and closure. The overarching objective of these reforms is to foster a conducive environment for business growth, enhance transparency and accountability, and fortify shareholder rights, thereby bolstering investor confidence in China's business ecosystem.

Capitalization Requirements

The revamped legislation introduces significant changes to capitalization norms for Limited Liability Companies (LLCs), aiming to enhance accountability and deter capital inflation practices. LLCs are now required to completely fulfill their registered capital obligations within five years from their establishment, underlining the importance of prompt adherence. Founding shareholders bear collective responsibility and are subject to joint liabilities if they fail to meet capital commitments or undervalue in-kind contributions, emphasizing their individual accountability. Additionally, directors are responsible for supervising capital contributions and may face penalties for negligence.

Companies have two ways to comply with the capital contributions regulations. Firstly, they may fully satisfy the registered capital requirement within the prescribed timeframe, typically within five years of incorporation, with full payment due by the fifth anniversary. For those established before this period, general adherence to the paid-in capital obligation after July 1, 2024, is mandatory, with a possible grace period. Alternatively, companies may consider a capital reduction to align registered capital with actual paid-in capital if full compliance is unfeasible or undesirable. Timely action is crucial to ensure compliance and avoid legal repercussions. These measures aim to strengthen financial integrity and regulatory compliance in the corporate sector, promoting transparency and investor confidence in the business environment.

Equity Transfers

The new Company Law introduces significant changes to equity transfer mechanisms for LLCs, simplifying procedures by eliminating the requirement for consent from other shareholders. Instead, shareholders must notify the company in writing of transfers, promoting prompt updates to the shareholders' register. Transferees assume accountability for outstanding capital contributions, with supplementary liability assigned to transferors. Additionally, the legislation mandates public disclosure of equity changes, enhancing transparency in corporate transactions and empowering minority shareholders to seek share repurchases in case of abuse by controlling shareholders, bolstering shareholder protections.

The tax implications of equity transfer for both individual and corporate shareholders are complex and regulated by specific provisions in tax legislation. Individual shareholders' initial valuation of transferred equity depends on various factors, with tax authorities intervening to ensure fair assessment, especially in cases lacking clear documentation. A weighted average approach is used for multiple equity acquisitions. Corporate shareholders, whether domestic or overseas, are subject to distinct tax frameworks. While individual income tax is based on itemized taxation, corporate income tax is linked to overall enterprise financial performance, potentially allowing for loss offsetting. Overseas non-resident corporations may benefit from preferential tax rates, influenced by tax treaties. Regardless of shareholder status, meticulous attention to tax obligations is crucial, particularly due to heightened government scrutiny during significant equity transactions. If you want more information regarding this matter, please read our article on equity transfers under China’s new Company law.

Reforming Corporate Governance and Shareholder Protections

The 2023 revisions to China's Company Law bring about substantial reforms to corporate governance structures, aiming to enhance transparency, accountability, and shareholder rights. Smaller LLCs have the option to forgo supervisors altogether with unanimous shareholder agreement. Joint Stock Companies (JSCs) are given the choice between a board of directors or supervisors, promoting autonomy in governance decisions. Additionally, the law sanctions the establishment of audit committees under the board of directors to strengthen internal financial oversight, though concerns about potential conflicts of interest arise when directors serve on these committees simultaneously.

Employee representation on the board of directors is expanded to all companies with 300 or more employees, aiming for inclusive corporate decision-making. Shareholder rights are bolstered with increased access to financial disclosures, empowering shareholders to demand equity buybacks and convene extraordinary meetings. Shareholders also gain the ability to initiate legal proceedings against directors or managers of wholly-owned subsidiaries for actions leading to company losses, safeguarding their interests.

Streamlined policies for company setup and closure aim to reduce administrative burdens. Simplified registration processes, particularly for single-shareholder companies, facilitate the formation of wholly-owned subsidiaries. The law mandates expedited formation of liquidation groups in cases of company dissolution, with penalties for non-compliance. Additionally, simplified deregistration procedures and mandatory mechanisms streamline company closure processes, promoting efficiency in business operations. Overall, these reforms aim to foster a transparent, accountable, and inclusive corporate environment conducive to business growth and investor confidence.

In conclusion, the 2023 Company Law of the People's Republic of China represents a significant shift in corporate governance and business operations. Scheduled to come into effect on July 1, 2024, these reforms encompass diverse areas such as capitalization requirements, equity transfers, corporate governance, shareholder rights, and streamlined company procedures. The overarching goal is to cultivate an environment conducive to business growth, transparency, accountability, and fortified shareholder protections. These reforms signal China's commitment to bolstering its business ecosystem, fostering investor confidence, and promoting sustainable economic development.

At PHC Advisory, we can offer you full support on matters regarding doing business in Italy and Asia, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.

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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way.

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