The new Company Law will be officially implemented on July 1, 2024, resulting in many enterprises starting to deal with capital reduction matters. Kaizen has summarized the following issues to pay attention to during the capital reduction process for clients' reference.

Judgment of corporate income tax related to corporate shareholders

Regarding the tax-related matters of corporate income tax, it can be divided into the following three situations:

1. The reduction equivalent to the initial capital contribution will be defined as the recovery of investment in the corporate income tax declaration and payment, which is exempt from tax.
   
   
2. The part of the reduction equivalent to the accumulated undistributed profit and accumulated surplus reserve of the invested enterprise calculated according to the proportion of the reduction of paid-in capital will be recognized as dividend, and the reduction of capital among qualified resident enterprises is exempt from tax. If you the aforesaid conditions cannot meet, you should pay enterprise income tax.
   
   
3. The portion other than the above will be considered as income from the transfer of investment assets and is subject to corporate income tax.

Guidelines of capital reduction process

1. Preparing balance sheets and property lists
   
   Based on the balance sheet and property list provided, the board of directors makes a preliminary judgment on whether the company's current operating conditions are suitable for capital reduction. The main considerations are as follows:
   
   

   a.	Whether the company's capital reduction will have a significant impact on the business situation of the company;
   b.	Whether the company will be insolvent and unable to repay its debts after capital reduction;
   c.	Whether it will affect the company's reputation and brand;
   d.	Whether the change of ownership structure will affect the shareholding ratio.

   
   
2. The Board of Directors shall formulate a capital reduction plan, and the shareholders' meeting shall make a decision on capital reduction
   
   According to the provisions of the Company Law and the Articles of Association, draft and sign capital reduction resolutions in accordance with the procedures stipulated in the Articles of Association.
   
   
3. Notifying creditors
   
   The company shall notify the creditor of the capital reduction within 10 days after the decision is made. In particular, it should be noted that the capital reduction application can be formally submitted only if the creditor does not raise objections to the capital reduction within 30 days from the date of receipt of the notice and the unknown creditor who has not received the notice does not raise objections to the capital reduction within 45 days from the date of announcement. Shareholders shall be liable for explicit creditors who are not notified during the capital reduction process.
   
   
4. Submitting application for capital reduction and obtaining updated business license after capital reduction
   
   
5. Handling the procedures of foreign investment information report change, tax change registration, foreign payment filing, bank remittance, etc.

KAIZEN Group is equipped with experienced and highly qualified professional consultants and is therefore well positioned to provide professional advice and services in respect of the formation and registration of company, application for various business licenses and permits, any compliance, tax planning, audit, and accounting in China. Please call and talk to our professional consultants for details.