INTRODUCTION
Article 47 of the new Company Law, which will come into effect on July 1 this year, clearly stipulates that the registered capital of a limited liability company shall be the amount of capital contribution subscribed by all shareholders registered with the company registration authority. The amount of capital contribution subscribed by all shareholders shall be paid in full by the shareholders within five years from the date of establishment of the company in accordance with the provisions of the articles of association. This provision is like a bombshell, instantly blowing up the corporate and legal circles, and the major media are vying to report it, which has set off waves of reductions, which can be seen from the recent full-page announcement of capital reduction on the paper media. The New Company Law also clearly stipulates whether the change from the subscription system to the paid-in system has retroactive effect on registered stock companies, that is, if a company established before the implementation period of capital contribution exceeds the prescribed period, it shall be gradually adjusted to the time limit specified in this Law, unless otherwise provided by laws, administrative regulations or the State Council[1]. This means that the new company law has established the principle of retroactivity of the paid-in system, and enterprises really need to take positive countermeasures against this.
1. Overview of tax-related risks of the countermeasures under the paid-in system
The response of enterprises to the paid-in system should be more precise, and the question of how the shareholders of the enterprise should respond to the paid-in system.
The author believes that the paid-in system is not a beast, and the shareholders of enterprises can calmly respond to their actual situation during the transition period. The first is to deregister and liquidate, and for companies that have no actual business at present and no business plans in the future, it is recommended to deregister and liquidate; second, to replenish capital, and for companies with good operating conditions under the investor's name, it is recommended that investors gradually increase their registered capital in batches during the transition period. Investments can be made in monetary or non-monetary ways. For example, assets such as real estate, land, machinery and equipment, or intangible assets can be used for investment; third, capital reduction or divestment, for those with high registered capital and the investor is unable to supplement the paid-in capital, the method of capital reduction or withdrawal can be adopted, but the capital reduction must strictly comply with the legal procedures; fourth, equity transfer, for shareholders who are unable or unwilling to bear the obligation to pay in, it is recommended to transfer equity to other shareholders or a third party other than shareholders.
In short, during the transition period, when the paid-in capital contribution, capital reduction and withdrawal are used to deal with the paid-in system, it may lead to the risk of tax evasion, early tax payment, late tax payment, overpayment of tax and the risk of missing or misusing preferential tax policies, and the slightest carelessness will also face serious consequences of back taxes, late fees and fines. This article attempts to briefly analyze the tax-related risks in the paid-in capital contribution and capital reduction and withdrawal from the perspective of taxation principles.
2. Analysis of tax-related risks of the enterprise's paid-in capital contribution
The paid-in capital is completed by the shareholders, and the different identities of the shareholders[2] and the different ways of paying in will also lead to differences in the applicable tax laws and policies and results, which can easily touch the red line of tax risks. In order to facilitate understanding, we try to analyze what tax risks will occur in the process of actual payment according to the actual payment method (stamp duty is negligible).
(1) Analysis of tax-related risks of monetary assets
There are two main types of paid-in methods, namely paid-in monetary assets and non-paid-in (investment) of monetary assets. From a tax point of view, there is a slight difference between the definition of monetary assets of individuals and the monetary assets of shareholders of companies. Personal monetary assets refer specifically to cash and bank deposits[3], while corporate monetary assets include accounts receivable, notes receivable, and mature bond investments in addition to cash and bank deposits[4], which is broader than personal monetary assets. In fact, paid-in capital is essentially an investment behavior, and under normal circumstances, shareholders do not need to bear tax liability when investing in monetary assets. However, if an individual invests with creditor's rights, because it is not an investment in monetary assets, it needs to be recorded according to the appraised value, and there may be a risk of non-payment of individual income tax for the part exceeding the principal amount of the creditor's rights in accordance with the provisions of the Individual Income Tax Law[5].
(2) Analysis of tax-related risks of non-monetary assets
Assets other than monetary assets mentioned above are non-monetary assets, and various types of shareholders pay (invest) in non-monetary assets, which involves many types of taxes and the situation is more complicated. Many people also wonder why they have to pay taxes on the investment of assets they own? In fact, the so-called investment in non-monetary assets in taxation has always followed an extremely important principle, that is, first realize it and then invest it. Investing in physical assets (non-monetary assets) is equivalent to selling assets at fair market value (usually the appraisal value of a professional appraisal agency) and then investing in monetary assets exchanged for realization. Taking the actual payment of real estate and land as an example, the payment obligations of value-added tax, land value-added tax, deed tax, individual income tax, enterprise income tax and stamp duty are often involved in the actual payment process. Among them, the preferential policy of deferred tax for 5 years is given to the individual income tax and enterprise income tax generated in the process of actual payment (investment) from the tax policy level [6]. If a merger, reorganization and other countermeasures are taken for reasonable commercial purposes, the preferential treatment of many tax types involved is very strong, and even the policy of non-levy, exemption or deferment can be enjoyed. Therefore, in the process of enriching paid-in capital with assets such as real estate and land, the risk of tax evasion often occurs at the same time as the risk of early tax payment, late tax payment or overpayment due to unfamiliarity with relevant tax policies. In practice, there is also a risk of missing out on certain preferential tax policies due to the fact that shareholders of enterprises with tight cash and insufficient physical assets are hungry to replenish their capital. For example, if the shareholders of an enterprise are unable to make monetary or in-kind payments, they can use intangible assets such as technological achievements to make actual payment (investment), and use the patents and technological achievements owned by the shareholders as the valuation investment, and enjoy the preferential tax policies of value-added tax and income tax while completing the actual payment[7].
3. Analysis of tax-related risks of capital reduction and divestment of enterprises
Capital reduction or divestment will most likely become a normal means of operation for most corporate shareholders to deal with the paid-in system. In order to identify tax risks in the specific operation process, it is necessary to correctly understand the basic meaning of capital reduction and divestment from the tax perspective. A capital reduction is a partial capital reduction, while a divestment is a full capital reduction and shareholders exit, both are essentially the same.
As far as individual income tax is concerned, although the divestment is also a capital reduction, it can generally be regarded as an equity transfer due to the possible change in the equity ratio[8], and the capital reduction is not within the scope of equity transfer stipulated in Announcement No. 67 [2014] of the State Administration of Taxation [9], and it will not necessarily cause equity changes, so it is not considered to be an equity transfer (at present, the implementation of tax authorities in different regions is different). This distinction means that when the shareholder is an individual, the capital reduction only needs to be declared and taxed when the tax liability occurs, and there is no so-called pre-tax risk, while the divestment needs to pay attention to the pre-tax risk factors and prepare for tax declaration in advance. The tax treatment of capital reduction or divestment of individual shareholders is not complicated, and the taxable income is generally determined according to the income from capital reduction or divestment[10] after deducting the original actual capital contribution (investment amount) and related taxes and fees, and the individual income tax is calculated and paid according to the income from property transfer.
As far as enterprise income tax is concerned, there is no pre-tax risk for corporate shareholders to reduce or divest their capital, and the tax treatment is basically the same. In accordance with the provisions of Announcement No. 34 [11] of 2011 of the State Administration of Taxation, after determining the income from capital reduction or divestment, the initial investment part shall be deducted first, and the second deduction (accumulated surplus + undistributed profits) * the proportion of the reduced paid-in capital, and if there is a balance, the enterprise income tax shall be calculated and paid according to the income from the transfer of investment assets.
To sum up, the author only makes a brief analysis of the tax-related risks of enterprises in dealing with the measures of the paid-in system, from the perspective of taxation principles. In practice, the measures taken by enterprises to deal with the paid-in system will be affected by multiple factors such as different shareholder entities, capital reduction methods, different regions, operating conditions and tax policies, and it is difficult to elaborate on the tax-related risks behind them. Here, the majority of shareholders of enterprises are reminded to consult the opinions and suggestions of relevant professional lawyers before making major decisions such as paid-in capital, capital reduction and withdrawal, equity transfer and cancellation and liquidation, so as to reduce the tax burden reasonably and legally while eliminating legal and tax risks in accordance with the law.
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