China Mainland | Highlights of revised Company Law

The revised Company Law of the People's Republic of China (PRC) that was adopted at the seventh meeting of the Standing Committee of the 14th National People's Congress on 29 December 2023 and will come into effect on 1 July 2024 (hereinafter referred to as the "2023 Company Law") makes changes that will affect multinational companies (MNCs).

Highlighted below are some key changes relevant to MNCs with equity investments or intending to invest in China.

• Shareholders of a limited liability company are now required to make their capital contributions within a defined time frame:
  
  • The capital contribution period shall not exceed five years.
    
    
  • This time frame would also apply to companies that are registered and established before the implementation of the 2023 Company Law.
    
    
  • However, if the company is unable to pay its debts when due, the company or the creditors shall have the right to require the shareholders to make their capital contributions in advance.
  • If a shareholder transfers equity that has a subscribed capital contribution before the payment deadline, the transferee bears the obligation to make the capital contribution. If the transferee fails to make the contribution in full on schedule, the transferor shall bear supplementary liability for the capital contribution.
     
• Equity interests and creditor's rights are allowed for capital contributions, except for capital contributions in cash or in kind with nonmonetary assets, such as physical assets, intellectual property rights and land use rights. Further, as prescribed in the revised Company Law, equity interests and creditor's rights are added to the list of allowable nonmonetary assets for capital contributions.

• The restriction on using the capital reserve to make up for a company's losses has been removed, and an order for using reserves to make up for losses is established in the 2023 Company Law — i.e., the discretionary surplus reserve and statutory surplus reserve must be used first to make up for the company's losses. Any excess losses may be made up by the capital reserve.

• A simplified capital reduction system provides that if the losses still cannot be made up after utilizing the capital reserve, the company may reduce its registered capital to make up for the losses. In such capital reduction scenarios, there is no need to notify creditors. However, an announcement must be made in the newspaper or through the national enterprise credit information publicity system within 30 days from the date when the shareholders' meeting makes the resolution to reduce the registered capital.

• The new law clarifies the statutory time limit for profit distribution, which should be within six months from the date of shareholders' resolution.

In addition, the 2023 Company Law: relaxes the provisions for setting up one-person limited liability companies; allows for the establishment of one-person joint stock limited companies; introduces dormancy registration for companies that are unable to continue operations due to force majeure or other difficulties; introduces the simplified merger system; improves the company establishment and exit systems; and updates requirements for legal representative positions and the number of directors on the board.

Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Tax Services Limited, Hong Kong

• Jane Hui

• Becky Lai

Ernst & Young (China) Advisory Limited

• Vickie Tan, Shanghai

• Walter Tong, Shanghai

• Raymond Zhu, Shanghai

• Andrew Choy, Beijing

• Ho Sing Mak, Shenzhen

Ernst & Young LLP (United States), China Tax Desk

• Min Fei, New York

• Ryan Lu, New York

• Alvin Lin, New York

• Lucy Wang, Chicago

• Kenny Guo, Chicago

• Diana Wu, San Jose

Ernst & Young LLP (United Kingdom), China Tax Desk, London

• Cyril Lau

• Elsie Chen

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

• Gagan Malik

• Dhara Sampat

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

• Pongpat Kitsanayothin

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.