Understanding the Tax Implications of the Revised Company Law
The recent revision of Company Law, adopted at the 14th National People’s Congress, is poised to introduce significant changes to the tax treatment of businesses and investments. With the law set to take effect on 1 July 2024, companies are bracing for an impact on their tax costs and a shift towards more stringent company compliance governance.
One of the notable amendments is the introduction of a horizontal corporate personality denial system in Article 23. This provision aims to hold shareholders responsible for the actions of other controlled companies, targeting those who use shell companies for profit shifting and tax evasion. The tax impact on companies engaged in such activities could be substantial, as tax authorities will have greater power to enforce compliance.
Investors should be wary of assuming independence between controlled entities to circumvent tax obligations. The new law clarifies that related enterprises not adhering to independent transaction principles may face special tax adjustments. This change underscores the need for robust tax management systems to avoid potential legal repercussions.
The revision also reforms the capital contribution system, setting a five-year period for companies to complete their contributions. This replaces the previous “zero contribution” policy, potentially increasing the tax burden for companies that fail to meet this deadline through restrictions on pre-tax interest deductions or capital reduction and equity transfer consequences.
For non-monetary contributions, such as investing with equity and creditor’s rights, companies must now adhere to fair value assessments and may face a one-time corporate income tax payment if equity or creditor’s rights are transferred or recovered within five years.
Individual shareholders must also navigate the tax implications of investing with equity or creditor’s rights, calculating taxable income based on assessed fair value and paying individual income tax on property transfer income.
The revision of Company Law demands heightened attention from companies towards their financial and tax management systems. Firms are encouraged to enhance their compliance governance, ensuring legal tax payment and mitigating taxation risks. Failure to adapt could result in not only financial penalties but also potential criminal liability.
Associates Wu Jiayu and Li Tong from Blossom & Credit Law Firm emphasize the importance of understanding these changes and preparing for their implementation. As the landscape of company law and tax regulation evolves, staying informed and compliant is more crucial than ever for businesses operating in today’s dynamic economic environment.
