Guide
The current Company Law of the People's Republic of China was adopted by the Fifth Session of the Standing Committee of the Eighth National People's Congress on December 29, 1993 and came into force on July 1, 1994. On December 29, 2023, the Seventh Session of the Standing Committee of the 14th National People's Congress deliberated and passed the revised Company Law, which will come into force on July 1, 2024. Passed and implemented at the same time after a gap of 30 years, this amendment pays tribute to the 30th anniversary of the Company Law, and the Company Law is moving towards a new era and a new journey.
The reason why this revision is called a major overhaul is because the revision of the company law lasted five years and went through four deliberations, according to tradition, the minor repair is "positive", and the major repair is "fixed", and the company law has undergone four amendments and one revision since its promulgation, and this revision is the second revision, which is the most revised content and the largest one since the implementation of the company law: the new company law has a total of 15 chapters and 266 articles, and the company law in 2018 On the basis of the 218 articles in 13 chapters, 16 articles have been deleted, and 228 articles have been added or amended, of which more than 110 articles have been substantively amended.
As the deepening and upgrading of state-owned enterprise reform is fully implemented in 2024 and ushers in a big year of reform, the importance of the new company law is self-evident to make up for the final shortcomings of the mature and finalized modern enterprise system with Chinese characteristics. We will also launch a series of explanatory articles to share information. Today, we will talk about the new company law and improve the company's profit distribution system.
03
The company's capital export system
The establishment of a company requires shareholders to invest capital, and it is also necessary to establish a system for shareholders to recover capital and obtain returns, which is the capital export system, and capital can only achieve sustainable and healthy flow with input and output. However, for a long time, although the mainland company law has undergone many revisions, the reform of the capital system of mainland companies is only concentrated in the capital formation stage, and the capital rules for the flow of capital or interests back to shareholders and the dissolution of the company in the operation of the company have not been revised, and the rules such as the company's capital reduction system and profit distribution system are still stuck in the 90s of the 20th century, and the strict capital export control will undoubtedly damage the confidence of investors, and then reduce investors' willingness to invest in the company.
The purpose of investors' investment is to obtain returns, and excessive capital export control is not conducive to the overall improvement of the company's capital system. The revision of the Company Law has improved the rules for capital export, and integrated the regulation of capital output such as profit distribution, equity repurchase, capital reduction, financial assistance, and company cancellation, making up for the last shortcoming of the company's capital system and providing a good legal environment for the company's investment and financing innovation.
(1) Refine the rules for profit distribution
Article 210 of the New Company Law: When a company distributes the after-tax profits of the current year, it shall withdraw 10% of the profits and include them in the company's statutory provident fund. If the cumulative amount of the company's statutory reserve fund is more than 50% of the company's registered capital, it can no longer be withdrawn.
If the company's statutory reserve fund is insufficient to make up for the losses of previous years, it shall first use the profits of the current year to make up for the losses before withdrawing the statutory reserve funds in accordance with the provisions of the preceding paragraph.
After the company withdraws the statutory reserve fund from the after-tax profits, it can also withdraw any reserve fund from the after-tax profits by resolution of the shareholders' meeting.
The after-tax profits remaining after the company makes up the losses and withdraws the provident fund, the limited liability company shall distribute the profits according to the proportion of the capital contribution paid by the shareholders, unless all shareholders agree not to distribute the profits according to the proportion of the capital contribution, and the profits of the company limited by shares shall be distributed according to the proportion of the shares held by the shareholders, unless otherwise provided in the articles of association.
Shares of the Company held by the Company shall not be subject to distribution of profits.
Article 212: Where the shareholders' meeting makes a resolution on the distribution of profits, the board of directors shall make the distribution within six months from the date of the resolution of the shareholders' meeting.
As a profit-making legal person, the meaning of the company's existence is to make a profit, and the most intuitive purpose of shareholders to invest in the company is to obtain capital gains, and the company's profit distribution is one of the important ways for shareholders to obtain capital gains, and the importance of the profit distribution system is self-evident. While keeping the original framework of the profit distribution system unchanged, the current revision of the Company Law adds the subject of responsibility for illegal distribution of profits, changes the opposition to the past against the compensation of capital reserves, strengthens the protection of the interests of creditors as a whole, and promotes the rational use of the company's capital.
Not only do investors need to ensure their right to profit distribution through the profit distribution system, but the actual controller of the company also needs to consider the impact of the profit distribution system on the company's continuous operation, ensure that the company's operation has sufficient capital, and avoid the catastrophic consequences faced by Evergrande Group after excessive profit distribution.
The profit distribution system involves conflicts of interest between different entities such as the company, shareholders, and creditors, and the profit distribution should be considered comprehensively, and one cannot be neglected at the expense of the other. On the basis of maintaining the existing institutional framework, the Company Law Amendment adjusts and adds some rules, the main rules of which are as follows:
There are four main points in the provisions of the New Company Law on the withdrawal of surplus reserve fund and the distribution of profits:
1. When the company distributes the after-tax profits of the current year, it shall withdraw 10% of the profits and include them in the company's statutory provident fund. If the cumulative amount of the company's statutory reserve fund is more than 50% of the company's registered capital, it can no longer be withdrawn.
2. If the company's statutory reserve fund is insufficient to make up for the losses of previous years, it shall first use the profits of the current year to make up for the losses before withdrawing the statutory reserve funds in accordance with the provisions of the preceding paragraph.
3. After the company withdraws the statutory provident fund from the after-tax profits, it can also withdraw any reserve fund from the after-tax profits by resolution of the shareholders' meeting.
4. The after-tax profits of the company after making up for the losses and withdrawing the provident fund shall be distributed by the limited liability company according to the proportion of the capital contribution paid by the shareholders, unless all shareholders agree not to distribute the profits according to the proportion of the capital contribution, and the profits of the company limited by shares shall be distributed according to the proportion of the shares held by the shareholders, unless otherwise stipulated in the articles of association. Shares of the Company held by the Company shall not be subject to distribution of profits.
In addition, in order to fully understand and grasp the company's profit distribution rules, it is also necessary to be familiar with the following three aspects:
The first is to master five important financial formulas:
1. Operating profit formula
Operating profit = operating income - operating costs - taxes and surcharges - period expenses - asset impairment loss + fair value change gain - fair value change loss + investment income - investment loss
2. Gross profit formula
Total profit = operating profit + non-operating income - non-operating expenses
3. Net profit formula
Net profit = total profit - corporate income tax
4. Corporate income tax formula
Corporate income tax = taxable income x 25%
5. Taxable income formula
Taxable income = total income - non-taxable income - tax-exempt income - various deductions - loss in previous years
The second is to correctly exercise the right to claim profit distribution:
Profit distribution is the statutory authority of the shareholders' meeting, and before the company has not made a resolution of the shareholders' meeting to distribute profits, shareholders only have the right to expect profit distribution, and cannot request the company to distribute profits. Only after the shareholders' meeting votes to approve the profit distribution plan, the dividends payable will be generated, and the shareholders will begin to enjoy the right to claim the payment of profits by the formula, and the nature of this claim is the right to claim for creditor's rights, that is, the shareholders have the right to claim the profits determined to be allocated to themselves in the company's profit distribution plan.
The third is to grasp the completion time of the company's profit distribution:
From the perspective of protecting shareholders' right to claim profit distribution, the New Company Law shortens the maximum time limit for profit distribution to six months, i.e., distribution shall be made within six months from the date of the resolution of the shareholders' meeting, which significantly shortens the time for the completion of profit distribution compared with the one-year period stipulated in Interpretation V of the Company Law, and strengthens the protection of shareholders' rights and interests.