Changing the Shareholders of a Foreign-Invested Company in China

An equity transfer moves shares between existing shareholders or to a third party. Total registered capital stays the same; only the shareholder line-up and shareholding ratios change, and the purchase price goes to the selling shareholder. A capital increase raises the company's registered capital by bringing in new shareholders or having existing shareholders invest more. Total registered capital goes up, and the funds go to the company for its operations. An equity transfer is procedurally simpler, while a capital increase is better for adding capital to the company. Which to choose depends on the commercial purpose: shareholders cashing out use a transfer; the company raising funds uses a capital increase.

Under the Foreign Investment Law and the Company Law, the main restrictions are: (1) transfers at Sino-foreign equity joint ventures and cooperative joint ventures require the unanimous consent of all shareholders; (2) the transfer must be approved by the original approving authority (the commerce department) and registered as a business change; (3) a partial transfer of foreign equity must not reduce the foreign share below 25%; (4) founders' shares in a foreign-invested joint stock company cannot be transferred within 1 year; (5) where a restricted industry on the negative list is involved, the foreign investment access review must be passed first. OTGEO can assess the restrictions and the compliant path for you.

About 1–2 months end to end. In detail: (1) plan design and document preparation, 1–2 weeks; (2) commerce filing, the same day or 5 working days; (3) tax filing and payment, about 1–2 weeks (if there is a gain); (4) business change registration, about 5–10 working days; (5) follow-up registrations (tax, foreign exchange, bank), about 1 week. If offshore documents need notarization and legalization (for example, proof of the new shareholder's legal status), add 2–4 weeks. Booking online speeds up review, and OTGEO can assist with expedited handling.

Three main taxes: (1) Corporate income tax: when a foreign shareholder transfers equity at a gain, withholding income tax is paid at 20% of the gain (reduced to 10% where China has a tax treaty with the shareholder's country); (2) stamp duty: 0.05% of the equity transfer agreement amount, paid by the transferor and transferee separately; (3) VAT: individual shareholders pay VAT on transfers of listed company equity, while transfers of unlisted equity are generally not subject to VAT. Rates may be lower in specific preferential tax areas (such as Hengqin or Qianhai). OTGEO can assist with tax planning and filing.

If the transferee fails to pay the consideration as agreed, the compliant party can: (1) claim liquidated damages or compensation under the agreement; (2) sue in court to require performance of the contract and payment; (3) before business change registration is completed, suspend or withdraw the change application. We recommend setting out the payment deadline, liability for breach and dispute resolution clause (such as arbitration) clearly in the agreement. OTGEO recommends completing payment before business change registration is finalized, or using third-party escrow to reduce risk.

After the change is registered, besides collecting the updated business license, you must complete: (1) tax change registration: report the shareholder change to the competent tax authority; (2) foreign exchange registration change: where foreign investment information changes, update the FDI registration with the State Administration of Foreign Exchange; (3) bank account updates: update the company's reserved seals and beneficial owner information; (4) annual report update with the commerce department: update shareholder information in the annual foreign investment information report; (5) where a special industry is involved, report to the industry regulator. OTGEO can complete the full set of follow-up registrations.