The Shake Up: Changing the Shareholder Structure of a Company in China

October 9, 2014 Posted by China Briefing Reading Time: 4 minutes

SHANGHAI – In China, the shareholders in a wholly foreign-owned enterprise (WFOE) are those who make capital contributions and represent the highest authority in the company. According to the Company Law, the functions and powers of shareholders are defined as follows:

Deciding on the operational policy and investment plan of the company;
Electing or replacing directors and supervisors who are not representatives of the staff and workers, and deciding on matters concerning the remuneration of directors and supervisors;
Examining and approving reports from the board of directors, reports from the board of supervisors or the supervisors, as well as the annual financial budget and accounts plan of the company;
Examining and approving the company’s plans for profit distribution and making up losses;
Adopting resolutions on the increase or reduction of the company’s registered capital, the issuance of corporate bonds, and the merger, division, dissolution, liquidation or transformation of the company;
Amending the company’s Articles of Association; and
Other functions and powers provided for in the company’s Articles of Association.

However, for a variety of reasons, sometimes it becomes necessary for a company to change its shareholder structure. Generally, a company decides to make such a change upon the entrance of a new shareholder who is to receive an equity transfer from one or more existing shareholders. Alternatively, it may be necessary to revise the shareholder structure as the result of equity transfers between shareholders or the exit of a shareholder from the company.

Though information on company shareholders is not explicitly listed on a Chinese business license, in most cases, the company will still need to apply for a new business license, considerably complicating the overall application process.

Step 1 — An equity transfer agreement should be signed between the transferor and the new shareholder. The company must issue a capital contribution certificate for the new shareholder (if applicable) and revise the list of shareholders.

Step 2 — The equity transferor or the transferee (the taxpayer) shall file with the competent tax authorities and obtain a tax payment certificate for individual income tax (IIT) or a tax exemption certificate.

Step 3 — The company must apply to the original AIC of registration for a change of company shareholders and obtain a “Notice of Acceptance.” This requires the following (as obtained in Step 1):

The equity transfer agreement
The new capital contribution certificate
The revised list of shareholders

Step 4 — The company should submit the following documents according to the “Notice of Acceptance” as obtained in Step 3 (in both original and duplicate) to the original AIC:

An application form
Proof of the designated representative or agent appointed by all shareholders (if applicable)
Approval documents obtained from relevant departments
Proof of a decision in accordance with laws and regulations
The revised Articles of Association signed by the legal representative
The equity transfer agreement
The approval of other investors for transferring equity
Qualification certificate for the equity transferee
Power of attorney for the service of legal documents
Other relevant materials
A copy of the previous business license

All English materials should be translated into Chinese and affixed with the seal of a translation company. A decision on the change of registered information will be made by the AIC within five days from the date of acceptance of the application.

Furthermore, the company will also need to file with relevant departments such as Customs, the State Administration of Foreign Exchange (SAFE) and the local Commission of Commerce. As with other changes to company registered information, the business license and the tax registration certificate will need to be updated as well.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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