Tax Treatment of Capital Reductions: Part I Formal Capital Reductions

August 05, 2024 | BY

Susan Mok

The amended PRC Company Law will have many, far-reaching effects, including motivating companies to reduce their registered capital in order to optimize capital utilization. Daisy Duan, Yingjie Yang and Cuishi Li of King & Wood Mallesons introduce the motivations and tax implications associated with one possible route: formal capital reductions

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Summary

  • Capital reductions can be categorized in various ways, and tax implications and accounting treatments vary accordingly and should be carefully considered
  • Formal Capital Reductions do not lead to a net asset outflow from the company
  • Under one scenario (reducing the unpaid subscribed capital to ease an overly- large capital contribution burden), there will be no accounting and tax implications for both the company and its shareholders
  • However, under a different scenario (reducing the paid-in registered capital to offset losses), there are alternative interpretations as to whether tax implications or only accounting changes result