Capital Increase
CHINA CAPITAL INCREASE ◎Concept and function of capital increase: Company capital increase means expand company business scale, business development, increase company credit and increasing the
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Chinese companies applying for Sino-foreign equity joint ventures, Sino-foreign contractual joint ventures, and wholly foreign-owned enterprises (hereinafter referred to as “three types foreign-invested enterprises”), if the Chinese company is established, due to various reasons, the original registered capital or the investment proportion of the investment subject may vary. Changes may occur, resulting in changes in the investor’s investment share.
Based on the registration place of overseas companies often chosen by Taiwanese businessmen, the method of equity transfer of overseas companies in mainland China makes the procedures for equity change and transfer simple and fast. However, the ultimate target of equity transfer is an entity operating enterprise in China after all. Whether it is expected to be listed in Taiwan or overseas, introduce strategic investors or simply adjust the shareholding structure by shareholders, it is necessary to restructure the group’s investment structure and indirectly occur. Circumstances of transferring the equity of enterprises in mainland China.
In China, the shareholder of a Wholly Foreign-Owned Enterprise (WFOE) is the investor and represents the highest authority of the company. According to the Company Law, the powers of shareholders are defined as follows:
However, for various reasons, sometimes a company has to change its shareholder structure by transferring shares from the shareholder to another person (either a new shareholder or an existing shareholder). The process of transferring existing shares from one person to another, either by sale or gift, is called a transfer of shares. Often, shares are transferred to bring in new shareholders. This is done by adding new shareholders or changing the existing share ratio among shareholders.
If a foreign-funded enterprise invests in a Chinese enterprise and wants to change/transfer its equity, it can be divided into two transaction methods: “direct equity transfer” and “indirect equity transfer”, as follows:
When a foreign-funded company sells equity directly to another person (a new shareholder or an existing shareholder) in a Chinese company, after the transaction is completed, the Chinese company needs to register with the local industry and commerce bureau to change the company’s shareholder. This transaction method is called “direct transfer of Chinese company equity”
Article 72 of the “Company Law of the People’s Republic of China”: There are no restrictions on the transfer of shares between shareholders. But if shareholders of a China limited liability company intend to transfer their shares to non-shareholders, certain requirements must be met. First, the transfer requires the consent of more than 50% of the other shareholders. Shareholders who transfer their shares must notify other shareholders in writing. If other shareholders do not object to the transfer within 30 days from the date of receipt of the notice, they shall be deemed to agree. If at least 50% of the other shareholders object to the transfer, they are obliged to buy the shares, otherwise, they are also deemed to agree. In addition, Article 72/2 of the Companies Act provides for the pre-emptive right of other shareholders for the shares to be transferred. After the transfer is approved, other shareholders can exercise their pre-emptive rights under the same conditions.
Chinese company law does not specify when a purchaser acquires ownership of the shares. Therefore, in China, the transfer of shares of a Chinese limited liability company is a common source of disputes, and the signing of a transfer agreement is not enough to transfer the shares. The new shareholder must be registered with the Chinese limited liability company’s shareholder list and the industry and commerce department. After registration with the industry and commerce administration To complete the replacement of the old shareholders. Although the information of the company’s shareholders is not clearly listed on the Chinese business license, the company still needs to apply for a new business license and update all corporate documents, making the entire application process quite complicated.
When a foreign investor indirectly transfers the equity of a Chinese domestic enterprise by controlling the shares of an overseas holding company, this transaction method is called “indirect transfer of equity of a Chinese company”.
For example, Company B owns 100% of Company C through many intermediate holding companies in many different jurisdictions, while Company Y (a non-Chinese tax resident enterprise) purchases all issued share capital of Company B from Company A.Foreign companies doing business in China often indirectly hold Chinese domestic companies through offshore companies (such as Seychelles or Viking BVI, etc.), and control domestic Chinese companies by holding the equity of overseas companies (offshore companies). If a foreign company changes/transfers and sells the equity of an “overseas holding company that holds shares of a Chinese company” to a new shareholder, the local Chinese domestic company does not need to register with the local industry and commerce bureau for changing the company’s shareholder. This transaction method is simpler and faster. .Enterprises engaged in equity changes may have subtle differences due to the regulations of various provinces in mainland China, but the basic taxes are as follows:
The tax rate is 10% (capital gains tax). Offshore company share transfer/change in accordance with China's current offshore indirect transfer reporting and tax rules, if a non-Chinese resident makes an offshore indirect transfer of China's taxable assets (including stocks, real estate, etc.), if the company is considered "no Reasonable business purpose”, the transaction will be re-characterized as a direct transfer of Chinese taxable assets and subject to Chinese corporate income tax at the rate of 10%.
If the mainland company does not change the registered capital, but only adds new shareholders, it is equivalent to the company's original shareholders transferring part of the equity to the new shareholders, and the transferor should pay 20% of the property transfer. (Personal Income Tax).
Corporate income tax = (income from equity transfer - principal - reasonable expenses) × 25% or 20%.
Reasonable expenditures actually incurred by an enterprise in connection with obtaining income, including costs, expenses, taxes, losses and other expenses, are allowed to be deducted when calculating taxable income. The corporate income tax rate is 25%; in the case of non-resident enterprises, the applicable tax rate is 20%.
(The above information is for reference only, the actual documents are still subject to local requirements. If you want to know more about the equity transfer information of mainland companies, please contact a professional agent.)
01.Propose to change application
The shareholders who transfer the equity shall submit an application to the company’s board of directors, and the board of directors shall submit it to the shareholders’ meeting for discussion and voting.
04.Cancellation of original shareholders
Recover the capital contribution certificate of the original shareholder, issue the capital contribution certificate to the new shareholder, and register the change in the company’s shareholder register.
02.Sign the equity transfer agreement
The old and new shareholders shall sign an equity transfer agreement, specifying the amount and price of the transferred equity.
05.Amend the Articles of Association
The new shareholder obtains the right to operate the company in mainland China, and the new shareholder redraws the company’s articles of association.
03.Notarization of transfer documents
Since the transfer contract is required to be legally effective, new shareholders must submit valid notarized documents.
06.Replace business license
After all the procedures are completed, the Industry and Commerce Bureau will re-issue the business license and revise the relevant information of the company’s shareholders. In addition, the company also needs to file with relevant departments such as the customs, the State Administration of Foreign Exchange and the local Commerce Bureau.
If you want to change and transfer shareholders/investors after the establishment of the company, you must make a very careful assessment, because this is not only to submit documents for industrial and commercial changes in accordance with regulations, but also involves many aspects such as taxation/capital/assets. Be sure to understand the local regulations and possible derived issues in advance, such as: whether the domestic legal representative/overseas authorized signatory needs to be changed together, or the relevant taxes that need to be levied after the transfer. If it is confirmed that the company’s equity transfer is carried out, it is strongly recommended to consult a professional agency company to assist the company in confirming whether the relevant documents are complete and compliant, the tax burden and the related cost. Some matters must be paid attention to when transferring equity, so as to avoid time-consuming and labor-intensive waste of money due to wrong evaluation.
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