China’s New Company Law: Latest Updates for Equity Transfer

China's New Company Law: Latest Updates for Equity Transfer


On 29 December 2023, the 7th meeting of the Standing Committee of the 14th National People’s Congress amended and passed the Company Law of the People’s Republic of China ( “new Company Law”), which will come into effect on 1 July 2024. There are many important amendments in the new Company Law as compared with the previous version. This article mainly introduces the changes and tax implications of the new Company Law in relation to the equity transfer of limited liability companies (“LLCs”), for reference.

Key Changes to the Equity Transfer Rules for LLCs

(1) No need to seek consent of “other shareholders” for external transfer of the equity of LLCs

Article 84 of the new Company Law removes the requirement that shareholders of an LLC need to obtain the consent of a majority of the other shareholders to transfer their equity externally and simplifies the procedures for external transfer and for the exercise of the right of first refusal by the other shareholders. It also clarifies that a shareholder who transfers his shareholdings to persons other than the existing shareholders shall notify the other shareholders in writing of such matters as the number of equity to be transferred, the price, the method of payment, and the period.

(2) Shareholders shall notify the Company in writing of the equity transfer

Since the equity transfer takes place between the transferor and the transferee and does not involve the company’s internal consideration procedures, the new Company Law adds a new Article 86, which provides for the obligation of shareholders in an equity transfer to notify the company, the right to request the company to change the register, and the company’s obligation to make a registration, and grants both the transferor and the transferee the right to seek judicial remedies in the event of the company’s failure to act. Paragraph 2 of this article clarifies that the content of the shareholders’ register shall be used as the basis for the confirmation of shareholders’ qualifications, and that the change of the shareholders’ register shall be used as the point of time for the change of shareholding. Therefore, timely updating of the register of shareholders after the transfer of equity is crucial for the transferee.

In addition, Article 56 of the new Company Law adds that the register of shareholders shall record the amount of capital contributed and paid in by shareholders, the manner and date of capital contribution, and the date of acquisition and loss of shareholders’ qualification.

(3) The transferee shall be responsible for the payment of the capital contribution that has not been paid before the equity transfer

Article 88 of the new Company Law adds that if the transfer of equity shares is made before the expiry of the capital contribution period, the transferee shall bear the obligation of capital contribution, and the transferor shall bear the supplementary liability for the part of capital contribution that the transferee fails to pay in accordance with the due date. The new shareholders not only enjoy the shareholders’ benefits of the original shareholders, but also bear the capital contribution obligations of the original shareholders accordingly. At the same time, in order to protect the interests of the company’s creditors, the new shareholders (the transferee) shall bear the first-ranking capital contribution liability, and the old shareholders (the transferor) shall bear the second-ranking supplementary liability for the new shareholders’ failure to pay the capital contribution on time.

The addition of this article strengthens the protection of the company and creditors and encourages the transferring shareholder to choose the transferee shareholder carefully by imposing supplementary liability on the transferor for the portion of the capital contribution not actually paid by the transferor.

(4) Information on equity changes shall be publicized

Article 40 of the new Company Law provides that a company shall, in accordance with the regulations, publicize information on changes to its equity and shares through the National Enterprise Credit Information Publicity System, and that the company shall ensure that the information so publicized is true, accurate and complete.

(5) If the controlling shareholder abuses its rights, the minority shareholders can claim that the company repurchase the equity

Article 89 of the new Company Law adds the right of other shareholders to request repurchase when controlling shareholders abuse their shareholder rights and seriously harm the interests of the company or other shareholders, i.e., other shareholders have the right to request the company to purchase the shares at a reasonable price. The addition of this rule strengthens the protection of small and medium-sized shareholders, provides them with effective remedies, and creates a more effective check on the abuse of shareholders’ rights by controlling shareholders.

Tax Implications

(1) the tax law provisions for determining the income tax on the transfer of equity interests by individual shareholders

The new company law requires companies to disclose the amount of paid-in capital. When individual shareholders transfer their equity, can they determine the initial price of the shares they hold based on the amount of publicized paid-in capital? The relevant provisions can be found in Article 15 of the Announcement of the State Administration of Taxation on the Issuance of Administrative Measures for Individual Income Tax on Income from Equity Transfers (for Trial Implementation) (Announcement of the State Administration of Taxation No. 67 of 2014). It states that the original value of the transfer of equity by an individual shall be recognized based on the following methods:

(i) For equity interests acquired with cash contributions, the original value of equity is based on the price paid plus any taxes or fees directly related to equity acquisition.

(ii) For equity interests acquired with non-monetary assets, the original value of equity is based on the value of the non-monetary assets at the time of investment, as recognized or approved by tax authorities, plus any taxes or expenses directly related to equity acquisition.

(iii) For equity acquired through a gratuitous transfer, the original value of equity is based on the taxes and expenses incurred in acquiring the equity, plus the original value of equity held by the original holder, in cases specified in Item 2 of Article 13 of the Measures.

(iv) For equity acquired by increasing share capital from capital surplus, surplus, or undistributed profits, and when individual shareholders have paid individual income tax in accordance with the law, the original value of equity is based on the amount of the transfer, related taxes and fees, and the newly transferred share capital.

(v) If none of the above cases apply, the competent tax authorities shall reasonably determine the original value of equity to avoid repeated levying of individual income tax.

Article 16 states that when the equity transferor has been approved by the competent tax authorities and individual income tax has been levied according to the law, the original value of equity of the equity transferee shall be recognized by the sum of the reasonable tax and expenses incurred in the acquisition of equity and the income from the transfer of equity approved by the competent tax authorities.

Article 17 allows competent tax authorities to approve the original value of equity when an individual transferring equity cannot provide complete and accurate evidence to calculate the original value of equity.

Article 18 outlines the use of the “weighted average method” to determine the original value of equity when an individual obtains the same investee enterprise equity multiple times and transfers some of it.

It is important to note that some tax bureaus may recognize the initial investment capital of new shareholders based on the transfer price paid to the original shareholders and the subsequent capital contribution obligations assumed under the contract.

(2) the tax law provisions for determining the income tax on the transfer of equity interests by shareholders of a company.

The shareholders of a company could be classified as Domestical Tax Resident Company, and Overseas Non-tax Resident Company:

The tax principles and calculation methods for income tax on equity transfer by tax resident shareholders of a company are similar to those for individual income tax on shareholders of a natural person. The difference lies in the fact that individual income tax is levied through itemized taxation and a single tax declaration can be filed for income generated from a specific equity transfer. However, enterprise income tax is paid through “pre-payment and annual remittance” and the income from equity transfer is taxed in combination with operating income.

Whether a company has to pay enterprise income tax on the income from the transfer of equity is based on the overall profit and loss of the enterprise in that year. It can also be applied to offset losses from previous years. Therefore, for shareholders of the company, even if the transfer of equity has gained, it may not necessarily require them to pay enterprise income tax.

For overseas non-resident enterprises, that is, foreign legal persons that have not established an establishment in China, the income is derived from sources within China that the non-resident enterprises have not established institutions or places in China as stipulated in Paragraph 3 of Article 3 of the Enterprise Income Tax Law, and the preferential enterprise income tax rate of 10% shall apply. If the country of residence of the transferor has signed a tax treaty with China, the terms of the Tax Treaty may apply.

It is important to note that when the shareholders of a company transfer a large amount of equity, the government’s oversight of the transaction is strong. Therefore, shareholders must ensure they pay proper attention to tax payment when involved in such business deals.


From the foregoing analysis, the modification of the new Company Law is on the basis of the existing Company Law, combined with judicial interpretations, practical needs, etc. to supplement and improve the original rules on the equity transfer, and the overall more focused on the regulation of the equity transfer and the protection of transaction security. Commercial entities should understand the relevant modifications of the new Company Law in a timely manner, and gradually apply the new provisions of the new Company Law in practice to ensure the compliance of the equity transfer.

D’Andrea & Partners Legal Counsel and PHC Advisory Tax & Accounting (companies of DP Group) offer full-scale legal compliance, tax advisory support and consultancy to address any concerns related to this issue. If you have any inquiries, you are welcome to contact us:

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