Legal Netlink Alliance Resources
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Legal Netlink Alliance Resources
Gain insights into new or unfamiliar markets.
This publication has been prepared for clients and professional associates of AnJie Broad Law Firm.
Since the implementation of the Foreign Investment Law in 2020, the legal mechanism for foreign investments has experienced a series of reforms in China which bring a number of changes to the requirements for transfer of equity interests in Chinese companies. This article will be focused on the noteworthy matters for foreign investors regarding closing process of transfer of equity interest in Chinese companies under the current legal mechanism. At the end of the article, we will also summarize major milestones for equity transfer closing process in three different scenarios.[1]
1. Noteworthy Matters for Foreign Investors
(1) Effectiveness of equity transfer
Except for a few highly regulated industries where equity transfer shall be subject to administrative approval of industrial authority, transfers of equity interests in most Chinese companies are considered by law as taking effective upon the time when the name of transferee is recorded on the shareholder register of the target company. In practice, where the target company does not have shareholder registerer, it is also commonly accepted that the equity transfer becomes effective when the equity transfer is resolved by the highest authority of the target company (i.e., shareholders’ meeting) and the transferee is recorded as shareholder in the resolution and the articles of association of the target company.
In accordance with the Chinese Company Law, the corporate registration of equity transfer with the registration authority (i.e., Administration for Market Regulation) will be carried out after the aforesaid resolution. The registration is only intended to make public the equity transfer and to serve as defense against outsiders. The equity interests have been already transferred to transferee before the corporate registration as discussed above from the perspective of the Chinese law.
(2) Registration and reporting mechanism
Following the adoption of resolution effecting the equity transfer, the target company shall directly apply to the registration authority for corporation registration for equity transfer within 30 days.
Equity transfers are not subject to approval by the Ministry of Commerce or its local counterparts anymore after the Foreign Investment Law is put into implementation. However, the information of the investment by foreign investors shall still be reported to the local counterpart of Ministry of Commerce for record purpose only. Most of the requested information are generally repetitive to the information requested for corporate registration. Nevertheless, it is noteworthy that the appraised value of the equity interest needs to be reported in case of acquisition by foreign investors of domestic enterprises (i.e., the enterprises whose shareholders are all Chinese companies). Explanation shall be also included where the purchase price is lower than 90% of the appraised value. That being said, according to our recent communications with authorities, we understand that authorities in most regions in practice don’t really impose the requirement for appraisal. Therefore, we suggest the foreign investor should consult with the local government about their attitude towards the appraisal requirement when planning its potential acquisition.
(3) Tax filing and payment
Equity transfers give rise to varied tax filing and payment obligations in China to transferor and/or transferee in different scenarios:
(a) Foreign to domestic scenario
In this scenario, the domestic transferee is required to conduct a tax filing with the Chinese tax authority prior to its remittance of the purchase price to the foreign transferor. Basically, apart from the transaction documents and the filing form, there is no other specific documents required for tax filing.
The foreign transferor in this scenario shall be the taxpayer of the Enterprise Income Tax of China (“EIT”). Normally, taxpayers shall declare and pay the tax by themselves, but where the taxpayer is a foreign enterprise, the counterparty shall be responsible to withhold the tax in China and pay the same to the Chinese tax authorities. Therefore, the domestic transferee is responsible, on the foreign transferor’s behalf, to conduct declaration of EIT arising from the equity transfer, and shall withhold EIT and pay it to the Chinese tax authority.
Please note that tax filing and EIT declaration and payment are two separate procedures. Only tax filing is the prerequisite for remittance of the payment of the purchase price. The domestic transferee can make the EIT declaration and payment after it remits the purchase price to the foreign transferor.
(b) Domestic to foreign scenario
No tax filing is required in this scenario. The domestic transferor is the taxpayer of EIT, thus no withholding is required. The domestic transferor shall declare and pay EIT arising from the equity transfer after it receives the purchase price from the foreign transferee.
(c) Foreign to foreign scenario
No tax filing is required in this scenario. The foreign transferee is responsible, on the foreign transferor’s behalf, to conduct declaration of EIT arising from the equity transfer, and shall withhold EIT and pay it to the Chinese tax authority; however, where the foreign transferee fails to withhold and pay EIT, or is unable to perform its obligation in this regard, the foreign transferor shall declare and pay EIT to the Chinese tax authority by itself.
(4) Payment of equity transfer
Since China implements stringent control over cross-border payments, the purchase price payment for equity transfer in foreign to domestic scenario and domestic to foreign scenario is subject to a series of pre-procedures. More specifically,
(a) after the completion of corporation registration for equity transfer, the target company shall make a foreign exchange registration for its equity transfer with the local foreign exchange administration through banks; and
(b) in the foreign to domestic scenario, the tax filing with tax authority for payment abroad shall be completed by the domestic transferee; or
in the domestic to foreign scenario, an asset realization account shall be opened by the domestic transferor for its receipt of the payment from the foreign transferee.
2. Closing Process in A Nutshell
In a nutshell, the basic closing process of an equity transfer from execution of definitive agreement through payment of purchase price in different scenarios are as follows:
(1) Foreign to domestic scenario
Step 1 Execution of definitive agreement
Step 2 Adoption of resolutions on equity transfer
Step 3 i. Corporate registration for equity transfer at Local Administration for Market Regulation
ii. Foreign investment information report at Local counterpart of Ministry of Commerce
iii. Tax filing for making payment abroad at Tax authority
Step 4 Foreign exchange registration at Foreign Exchange Administration/Bank
Step 5 Remittance of purchase price at Bank
(2) Domestic to foreign scenario
Step 1 Execution of definitive agreement
Step 2 Adoption of resolutions on equity transfer
Step 3 i. Corporate registration for equity transfer at Local Administration for Market Regulation, and
ii. Foreign investment information report at Local counterpart of Ministry of Commerce
Step 4 Foreign exchange registration at Foreign Exchange Administration/Bank
Step 5 Opening asset realization account at Bank
Step 6 Remittance of purchase price at Bank
(3) Foreign to foreign scenario
Step 1 Execution of definitive agreement
Step 2 Adoption of resolutions on equity transfer
Step 3 i. Corporate registration for equity transfer at Local Administration for Market Regulation, and
ii. Foreign investment information report at Local counterpart of Ministry of Commerce
In foreign to foreign scenario, as there is no cross-border payment involving China, the payment of purchase price for equity transfer in this scenario will not be subject to any pre-procedures in China.
[1] The equity transfer transactions in China involving foreign investors are generally comprised of three scenarios: (i) foreign to domestic scenario (i.e., foreign investor selling equity interest to Chinese domestic company); (ii) domestic to foreign scenario (i.e., foreign investor acquiring equity interest from Chinese domestic company); and (iii) foreign to foreign scenario (i.e., foreign investor selling equity interest to another foreign investor).
While every effort has been made to ensure accuracy, this publication is not an exhaustive treatment of the area of law discussed and AnJie Broad Law Firm accepts no responsibility for any loss occasioned to any person acting or refraining from action as a result of the material in this publication. Please seek the services of a competent professional advisor if advice concerning individual problems or other expert assistance is required.
