The new company law stipulates that the registered capital must be paid in full within 5 years from the date of establishment of the company. This new regulation effectively curbs the problems of blind subscription, excessive subscription and excessively long subscription period, which means that those extreme cases of setting the registered capital at trillions of yuan will no longer exist as soon as they are established. In the past decade or so, some enterprises have set their registered capital at will, but after the new law comes into effect, these enterprises are likely to need to reduce their capital. This article reviews the tax and accounting treatment of capital reductions.
1. Relevant provisions of the Company Law of the People's Republic of China on capital reduction
Article 47 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.
Where laws, administrative regulations, and decisions of the State Council have other provisions on the paid-in registered capital of a limited liability company, the minimum amount of registered capital, and the period of capital contribution by shareholders, such provisions shall prevail.
Article 224 When a company reduces its registered capital, it shall prepare a balance sheet and a list of assets.
The company shall notify creditors within 10 days from the date on which the shareholders' meeting makes a resolution to reduce the registered capital, and make an announcement in the newspaper or the national enterprise credit information publicity system within 30 days. Within 30 days from the date of receipt of the notice, and within 45 days from the date of announcement if the creditor does not receive the notice, the creditor has the right to require the company to repay the debts or provide corresponding guarantees.
If a company reduces its registered capital, it shall reduce the amount of capital contribution or shares in accordance with the proportion of capital contributed or shares held by shareholders, unless otherwise provided by law, otherwise agreed by all shareholders of a limited liability company, or otherwise provided by the articles of association of a company limited by shares.
Article 225 Where a company still suffers losses after making up its losses in accordance with the provisions of Paragraph 2 of Article 214 of this Law, it may reduce its registered capital to make up for its losses. If the registered capital is reduced to make up for the loss, the company shall not distribute it to the shareholders, nor shall it exempt the shareholders from the obligation to pay capital contributions or shares.
Where the registered capital is reduced in accordance with the provisions of the preceding paragraph, the provisions of paragraph 2 of the preceding article do not apply, but it shall be announced in a newspaper or in the national enterprise credit information publicity system within 30 days from the date on which the shareholders' meeting makes a resolution to reduce the registered capital.
After the company reduces its registered capital in accordance with the provisions of the preceding two paragraphs, it shall not distribute profits until the cumulative amount of the statutory reserve fund and the discretionary reserve fund reaches 50% of the registered capital of the company.
Article 226 Where the registered capital is reduced in violation of the provisions of this Law, the shareholders shall return the funds they have received, and if the capital contributions of the shareholders are reduced, they shall be restored to their original state;
2. The invested enterprise makes a profit when the capital is reduced
(1) The tax will be dealt with in the case of capital reduction of corporate shareholders
According to the first paragraph of Article 5 of the Announcement of the State Administration of Taxation on Several Issues Concerning Enterprise Income Tax (Announcement No. 34 of 2011 of the State Administration of Taxation), the part of the assets obtained by an investment enterprise that is equivalent to the initial capital contribution shall be recognized as investment recovery, the part equivalent to the accumulated undistributed profits and accumulated surplus reserve of the invested enterprise calculated according to the proportion of reduced paid-in capital shall be recognized as dividend income, and the remaining part shall be recognized as income from the transfer of investment assets.
Example 1: Company A invests RMB 5 million in Company B in July 2017 and becomes a shareholder of the company and holds 10% of the company's shares. In December 2020, Company A divested its 10% stake in Company B. At the time of the divestment, the total accumulated undistributed profits and accumulated surplus reserves of Company B were 16 million yuan, and the actual cash distribution of Company A was 8 million yuan.
Debit: Bank deposit 800
Credit: Long-term equity investment 500
Investment income 300
The first step is to confirm the return on investment = 500 (10,000 yuan);
The second step is to confirm that dividend income = 1600×10% = 160 (10,000 yuan), and exempt from enterprise income tax;
The third step is to confirm the income from the transfer of investment assets = 800-500-160 = 140 (10,000 yuan).
When Company A handles the final settlement before May 30, 2021, it should fill in the A107011 "Detailed Statement of Preferential Dividends, Bonuses and Other Equity Investment Income among Eligible Resident Enterprises" and the A105030 "Detailed Statement of Tax Adjustment of Investment Income".
A105030 Statement of Tax Adjustments to Investment Income
Unit: 10,000 yuan
A107011 a breakdown of dividends, bonuses and other equity investment income among eligible resident enterprises
Unit: 10,000 yuan
(2) The tax will be dealt with for the capital reduction of individual shareholders
According to Article 1 of the Announcement of the State Administration of Taxation on Issues Concerning the Collection of Individual Income Tax on the Recovered Funds from the Termination of Investment and Operation of Individuals (Announcement No. 41 of 2011 of the State Administration of Taxation), an individual terminates investment, joint operation, business cooperation and other behaviors for various reasons, and obtains equity transfer income, liquidated damages, compensation, etc. from the invested enterprise or cooperative project, other investors of the invested enterprise and the operating partner of the cooperative project. Compensation and money recovered under other names are taxable income of individual income tax, and individual income tax shall be calculated and paid in accordance with the applicable provisions of the item of "income from property transfer".
The formula for calculating taxable income is as follows:
Taxable income = the total amount of equity transfer income, liquidated damages, compensation, compensation and other recoveries obtained by the individual - the original actual capital contribution (investment amount) and related taxes and fees
Example 2: Company A has a paid-in capital of 10 million yuan, has 2 natural person shareholders, shareholder A accounts for 40%, shareholder B accounts for 60%, and the current surplus reserve on the book of company A is 20 million yuan, and the undistributed profit is 30 million yuan. Due to internal problems, in April 2020, shareholder A withdrew his capital and recovered 50 million yuan. How to pay taxes when shareholder A withdraws capital?
The first step is to confirm the equity transfer income obtained by the individual = 5,000 (10,000 yuan)
The second step is to confirm the original actual capital contribution (investment) = 1000×40% = 400 (10,000 yuan)
The third step is to calculate the taxable income = the total amount of equity transfer income, liquidated damages, compensation, compensation and other recoveries obtained by the individual - the original actual capital contribution (investment) and related taxes and fees = 5000-400 = 4600 (10,000 yuan)
The fourth step is to calculate the individual income tax on the income from property transfer = 4600×20% = 920 (10,000 yuan)
Company A shall withhold the individual income tax of RMB 9.2 million from shareholder A before May 15, 2020, submit the Individual Income Tax Withholding Return to the competent tax authority, and pay the tax into the treasury.
3. The invested enterprise loses money when the capital is reduced
(1) Reduce the registered capital to make up for the loss
The registered capital is the capital invested by the shareholders in the enterprise, and if the enterprise reduces the registered capital, the shareholders should recover the investment amount accordingly. Covering the operating losses with the capital reduction funds of the enterprise is equivalent to the investment of shareholders in the nature of donations to the invested enterprise, and the profits generated by the invested enterprise shall be regarded as taxable income of enterprise income tax.
1. Henan Provincial Taxation Bureau's 12366 hotline replied to hot questions in June 2021
Q: How to deal with corporate income tax if shareholders reduce their capital to make up for losses?
Answer: Shareholders should reduce their capital to make up for their losses, which should be decomposed into two steps: returning the money to the shareholders after the company's capital reduction and donating the money to the company to make up for the losses.
In the first step, corporate shareholders should be dealt with in accordance with Article 5 of Announcement No. 34 of 2011 of the State Administration of Taxation, and individual shareholders should be dealt with in accordance with Announcement No. 41 of 2011 of the State Administration of Taxation.
Corporate shareholders: According to the announcement of the State Administration of Taxation on several issues concerning enterprise income tax (Announcement No. 34 of 2011 of the State Administration of Taxation), it is stipulated that: In the case of withdrawal or reduction of investment by an investment enterprise, the part of the assets acquired by the investment enterprise that is equivalent to the initial capital contribution shall be recognized as investment recovery, the part equivalent to the accumulated undistributed profits and accumulated surplus reserve of the invested enterprise calculated in proportion to the reduction of paid-in capital shall be recognized as dividend income, and the remaining part shall be recognized as income from the transfer of investment assets. The operating losses incurred by the invested enterprise shall be carried forward and made up by the invested enterprise in accordance with the regulations, and the investment enterprise shall not adjust or reduce its investment costs, nor shall it recognize them as investment losses. ”
Individual shareholders: According to the announcement of the State Administration of Taxation on the collection of individual income tax on the recovery from the termination of investment and operation (Announcement No. 41 of 2011 of the State Administration of Taxation), it is stipulated that: "1. An individual terminates investment, joint operation, business cooperation and other behaviors for various reasons, and obtains equity transfer income, liquidated damages, compensation, etc. from the invested enterprise or cooperative project, other investors of the invested enterprise and the operating partner of the cooperative project. Compensation and money recovered under other names are taxable income of individual income tax, and individual income tax shall be calculated and paid in accordance with the applicable provisions of the item of "income from property transfer".
The formula for calculating taxable income is as follows:
Taxable income = total amount of equity transfer income, liquidated damages, compensation, compensation and other recoveries obtained by the individual - the original actual capital contribution (investment amount) and related taxes and fees"
In the second step, if the investment enterprise withdraws or reduces its investment from the invested enterprise, and the reduced capital enterprise reduces its paid-in capital, if it fails to pay consideration to the investor, the reduced amount shall be recognized as the donation income of the current period and included in the taxable income for enterprise income tax, regardless of whether the enterprise uses the reduced paid-in capital to make up for the losses of the previous year or increase the capital reserve of the enterprise.
2. The 12366 tax service platform of the State Administration of Taxation included the 2019 reply of the Liaoning Provincial Taxation Bureau
Q: 1. Our company is a Sino-foreign joint venture, the shareholders are corporate shareholders, in order to optimize the capital structure, to make up for the accumulated losses in previous years by way of capital reduction, the capital reduction is not remitted to the shareholders, the accounting treatment is: borrow: paid-in capital loan: undistributed profits, how to deal with the relevant enterprise income tax on this matter. 2. After the capital reduction makes up for the loss, whether the loss that has not been made up for income tax can continue to be made up. 3. How to deal with the excess part of the enterprise income tax if the capital reduction is greater than the loss due to the exchange rate.
Reply: According to the "Decision of the Standing Committee of the National People's Congress on Amendment" <中华人民共和国企业所得税法>(Order No. 64 of the President of the People's Republic of China), "Article 6 The income obtained by an enterprise from various sources in monetary and non-monetary forms shall be the total income. Article 7 The following incomes in the total income are non-taxable income:
(1) Financial allocations;
(2) Administrative fees and government funds collected in accordance with law and included in financial management;
(3) Other non-taxable income as prescribed by the State Council.
Article 18 The losses incurred by an enterprise in the tax year shall be carried forward to the following years and made up with the income of the following years, but the maximum period of carry-over shall not exceed five years. ”
According to your description, the non-remittance of the capital reduction to the shareholders is equivalent to the return of the money to the shareholders after the capital reduction of your company, and the shareholders then donate the same amount to your company to cover the loss, and in accordance with the provisions of the above documents, the income shall be recognized according to the provisions and the loss shall be made up in accordance with the law.
3. Dalian Taxation Bureau of the State Administration of Taxation online message selection "tax-related treatment of nominal capital reduction"
Q: Our company's paid-in capital is 700 million yuan, and the cumulative undistributed profit is -450 million yuan. In order to improve the structure of the financial statements, after consultation among the shareholders, it is proposed to integrate resources through nominal capital reduction and deficit compensation, that is, to make up for undistributed profits with paid-in capital, the actual net assets remain unchanged, and there is no actual cash flow between the enterprise and shareholders. According to the Announcement of the State Administration of Taxation on Several Issues Concerning Enterprise Income Tax (Announcement No. 34 [2011] of the State Administration of Taxation), the operating losses incurred by the invested enterprises shall be carried forward and made up by the invested enterprises in accordance with the regulations. According to the understanding of this policy, if an investment enterprise is not allowed to recognize investment losses and does not reduce the taxable income, should the invested enterprise not and should not recognize the income and increase the taxable income by making up for the losses?
Answer: First, the question mentions that "the operating losses incurred by the invested enterprises shall be carried forward and made up by the invested enterprises in accordance with the regulations; the investment enterprises shall not adjust and reduce their investment costs, nor shall they recognize them as investment losses." "In the understanding of the content of the provisions, we believe that the invested enterprise and the investment enterprise belong to two independent taxpayers, and under normal business conditions, they shall not make up for each other's losses, and when the invested enterprise suffers operating losses, the investment enterprise shall not reduce its investment costs or recognize investment losses unless the investment enterprise disposes of its equity holdings or the invested enterprise is liquidated.
Second, with regard to the issue of nominal capital reduction to make up for the loss of undistributed profits mentioned in the enterprise issue, we believe that this matter should be divided into two steps in the treatment of enterprise income tax: the first step is to reduce the capital of the enterprise shareholders and recognize the investment profit and loss, and at the same time, the invested enterprise is unable to actually pay the amount payable, and the second step is to return the reduced paid-in capital to the enterprise, and the amount payable by the enterprise is reduced, which is incorporated into the total income of the enterprise as an income item.
Accounting Treatment:
Borrow: paid-up capital
Credit: Profit distribution
(2) Cash reduction and cash reduction
According to Article 71 of the Regulations for the Implementation of the Enterprise Income Tax Law of the People's Republic of China, the term "investment assets" in Article 14 of the Enterprise Income Tax Law refers to the assets formed by the enterprise's external equity investment and creditor's rights investment. When an enterprise transfers or disposes of investment assets, the cost of investment assets is allowed to be deducted.
In addition, according to the first paragraph of Article 5 of the Announcement of the State Administration of Taxation on Several Issues Concerning Enterprise Income Tax (Announcement No. 34 of 2011 of the State Administration of Taxation), the part of the assets obtained by an investment enterprise that is equivalent to the initial capital contribution shall be recognized as investment recovery, the part equivalent to the accumulated undistributed profits and accumulated surplus reserve of the invested enterprise calculated in proportion to the reduction of paid-in capital shall be recognized as dividend income, and the remaining part shall be recognized as income from the transfer of investment assets. If the assets obtained do not exceed the part of the capital contribution during the withdrawal or reduction of capital, it is equivalent to the loss of the investment cost that has not been fully recovered. Therefore, divestment and capital reduction can recognize investment losses.
Example 3: Company A invested $8 million in Company B in July 2020 and became a shareholder of the company and held 10% of the company's shares. In December 2022, Company A divested its 10% stake in Company B. At the time of divestment, the total accumulated undistributed profit of Company B was -10 million yuan, and Company A actually distributed 7 million yuan in cash.
Debit: Bank deposit 700
Investment income 100
Credit: Long-term equity investment 800
The investment loss recognized by the tax law = equity tax basis - equity disposal income = 800-700 = 100 (10,000 yuan), and the amount of loss recognized by accounting is consistent with the amount of loss recognized by the tax law, and there is no difference.
When Company A handles the final settlement before May 30, 2023, it should fill in the A105090 pre-tax deduction and tax adjustment statement of asset losses
4. Comparison of income from the transfer of investment assets under the three methods of capital reduction (divestment), equity transfer and liquidation
Divestment refers to the withdrawal or reduction of investment by an investment enterprise from the invested enterprise, and the part of the assets acquired by the investment enterprise equivalent to the initial capital contribution shall be recognized as investment recovery; the part equivalent to the accumulated undistributed profits and accumulated surplus reserve of the invested enterprise calculated in proportion to the reduction of paid-in capital shall be recognized as dividend income; and the remaining part shall be recognized as income from the transfer of investment assets.
Equity transfer, the income from the transfer of equity after deducting the cost incurred in obtaining the equity, is the income from equity transfer. When calculating the income from equity transfer, the enterprise shall not deduct the amount that may be distributed according to the equity in the undistributed profits and other retained earnings of the shareholders of the invested enterprise.
In the case of liquidation, the remaining assets of the investor enterprise from the liquidated enterprise, which are equivalent to the part that should be shared from the accumulated undistributed profits and accumulated surplus reserve of the liquidated enterprise, shall be recognized as dividend income, and the balance of the remaining assets after deducting the above-mentioned dividend income, and the part exceeding or lower than the investment cost shall be recognized as the income or loss from the transfer of investment assets. The calculation formula is as follows: income from the transfer of liquidated investment assets = amount of remaining assets distributed - dividend income (equivalent to the part of the accumulated undistributed profits and accumulated surplus reserves of the liquidated enterprise calculated according to the proportion of shares held by the shareholder) - shareholders' investment costs.
Compared with the three, the undistributed profits and surplus reserves corresponding to liquidation and divestment enjoy tax exemption treatment, and the income from equity transfer shall not deduct the amount that may be distributed according to the equity in the undistributed profits and other retained earnings of shareholders of the invested enterprise, and the corresponding part of undistributed profits and surplus reserves shall not enjoy tax exemption treatment.
The order of liquidation and divestment is different, liquidation is that after the remaining assets are calculated, the first step is to recognize the dividends and bonuses, the second step is to divide the registered capital of the current year, and the third step is to recognize the income or loss from equity transfer. After the divestment is recovered, the first step is to recognize the return of investment, the second step is to recognize the income from dividends and bonuses, and the third step is to recognize the income or loss from equity transfer.
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