In December 2022, the thirty-eighth meeting of the Standing Committee of the thirteenth National People's Congress (NPC) conducted a second review of the draft revision of the Company Law. Based on the deliberations of the Standing Committee and the views of various parties, the Third Review Draft submitted for consideration at this meeting proposes a number of amendments, one of which is to improve the registration system for the contribution of registered capital, requiring that "the amount of capital contributed by shareholders of a limited liability company shall be paid in full within five years from the date of the company's establishment." This provision has had a subversive impact on the previous rules for the establishment of a limited liability company under the contribution system, and has an important role in urging shareholders to fulfill their responsibility to make contributions and further protect the interests of creditors. However, how to determine the period of contribution of shareholders of the established limited liability company? If the accelerated expiration of the contribution of its inability to pay the capital and what to do? The most once-and-for-all way is to liquidate the company cancellation, to avoid the full payment of contributions due to failure to outbreak of shareholder liability risk, which will also involve a variety of tax issues, this paper is intended to focus on the resolution of the shareholders' meeting to dissolve the cancellation of the company's tax risk analysis of this situation.

I. What is the liability of shareholders when the period of contribution of registered capital is limited?

Under the contribution system, except for the laws, administrative regulations and the State Council's decision on the paid-in registered capital and the minimum registered capital of a limited liability company, the manner, amount and time of capital contribution of the shareholders of a limited liability company shall be stipulated in the articles of association of the company, which in fact does not explicitly limit the period of capital contribution of the shareholders, and the shareholders enjoy a huge period of interest under the current company law. However, the provision in the Third Review Draft aims to urge the shareholders to inject capital into the company as soon as possible, which makes the shareholders face the responsibility of failing to pay the capital contribution in full and on time earlier.

(I) Liability to the company

(1) Replenishment of Capital Contribution

According to the provisions of Article 28 of the current "Company Law", the shareholders shall have the obligation to pay the full amount of their respective capital contributions as stipulated in the articles of association of the company, and the shareholders failing to fulfill this obligation shall make up the full amount of capital contributions to the company. In accordance with the provisions of article 88 of the second draft of the company law, even if the shareholders have contributed to the capital but not the period of the equity transfer, if the transferee fails to pay the full amount of capital, the original shareholders still have to pay the capital in full, the original shareholders are still to pay the capital in accordance with the supplemental liability.

(2) Dismissal of Shareholder Qualification

If a shareholder still fails to fulfill the obligation of capital contribution after being reminded by the company to pay or return the capital, the company has the right to convene a shareholders' meeting to resolve to terminate the shareholder's qualification in accordance with Article 17 of the "Provisions of the Supreme People's Court on the Application of Certain Issues of the Company Law of the People's Republic of China (III)". The second review draft of the company law article 51 also further clarifies the shareholders lose the right to call for capital contribution procedures, capital contribution grace period and the legal consequences of failing to fulfill the capital contribution obligations, for the loss of equity within six months neither transferred, nor the corresponding reduction of registered capital and cancellation of the equity stake, the company's other shareholders should also be in accordance with the proportion of its capital contribution in full payment of the corresponding capital contribution. Shareholders who fail to pay the capital contribution in full and on time, causing losses to the company shall also be liable for compensation.

(II) Liability for shareholders who have paid the capital contribution in full and on time

According to the provisions of Article 28 of the current "Company Law", the shareholders who fail to pay the capital contribution in full on time, in addition to paying the full amount to the company, shall also bear the liability for breach of contract to the shareholders who have paid the capital contribution in full on time.

(III) Liability to creditors

If the shareholders fail to fulfill or not fully fulfill the obligation of capital contribution, the creditors shall have the right to request the shareholders to bear the supplementary compensation liability for the part of the company's debts that cannot be settled within the scope of the interest on the unprovided capital in accordance with Paragraph 2 of Article 13 of the "Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (3)". If the company's property is insufficient to settle the debt determined by the effective legal instrument, the company has been listed as the executor, the creditor can add the shareholders who have not paid or not paid the capital contribution in full, as well as the original shareholders who have not fulfilled the obligation of capital contribution in accordance with the law that is the transfer of the equity interest as the executor, to bear the responsibility within the scope of the unprovided capital contribution in accordance with the law. And, the second draft of the company law review article 53 for shareholders to contribute to the term of the interests of the limit, the company can not pay the debts due, regardless of whether there is a cause of insolvency of the company, or in the company's debt after the extension of the shareholders to contribute to the term of the circumstances, shareholders contribute to the accelerated expiration of the capital, the company or the creditors of the expired claims are entitled to require that have been subscribed to the capital contribution, but not the term of the capital contributions of the shareholders to pay the capital ahead of time. The Company or the creditors of the due claims shall have the right to request the shareholders who have made contributions but have not yet paid the contributions to pay the contributions in advance.

(IV) Other Liabilities

Where a shareholder of a company makes a false capital contribution and fails to deliver, or fails to deliver on time, the monetary or non-monetary property used as capital contribution, the company registration authority may order the shareholder to make corrections and impose a fine of not less than 5% and not more than 15% of the amount of the false capital contribution.

(V) Summary

The contents and trends of the second and third drafts of the revised Company Law are comprehensive, and the revision of the Company Law is imperative to strengthen the responsibility of shareholders' capital contribution, especially to amend the phenomena of arbitrary determination of registered capital and false capital contribution under the subscription system. At present, it is not clear whether the provisions on the limitation of the period of contribution of registered capital are retroactive to the companies established before the amendment of the Company Law. If the amendment on the limitation of the period of contribution of registered capital and the strengthening of the responsibility of shareholders is formally adopted, it will be difficult for shareholders who have not yet made full payment of capital to get rid of their responsibility of capital contribution completely through the transfer of equity, and they will more likely to reduce the risk through the reduction of capital or the dissolution of the company by way of writing off the company. Shareholders in the above predicament should note that, whether it is a capital reduction or write-off, they should also pay attention to the possible tax-related risks, which will be introduced in the following section on the tax-related risks of company dissolution and write-off.

II. How to deal with the personal income tax that has not been withheld and paid by the enterprise after it has been canceled?

In order to avoid the enterprise to "pay" for the consumer expenditure of shareholders (individual investors, the same hereinafter) or to borrow from shareholders in the form of long-term transactions and other forms of disguised distribution of dividends and bonuses to shareholders without withholding personal income tax, the tax law clearly stipulates the tax obligations of such behavior. If the shareholders subscribed to the capital contribution period has expired, but the shareholders actually failed to fulfill the capital contribution obligations, the shareholders of the enterprise is responsible for making up the capital contribution, from the substantive point of view of the responsibility belongs to the shareholders of the enterprise is liable for the capital interest within the scope of a debt. If the enterprise is canceled, the shareholders of its capital contribution to the claims will also be liquidated by the liquidation, for the enterprise debt settlement.

(I) Individuals' tax obligations in respect of consumer expenditures incurred by legal person enterprises and loans from investment enterprises

According to the "Ministry of Finance, State Administration of Taxation on the standardization of individual investors on personal income tax collection management notice" (Cai Shui [2003] No. 158), the shareholders will be themselves, their family members and related personnel and enterprise production and operation of consumer spending and purchase of automobiles, housing and other property expenditures from the legal person of the enterprise, or tax year to the legal person of the enterprise borrowing, at the end of the tax year neither return, and not used for enterprise debt repayment. If the funds paid by the enterprise or the unreturned loans are not used for the production and operation of the enterprise, the funds paid by the enterprise or the unreturned loans can be regarded as dividend distribution from the enterprise to the shareholders, and the shareholders shall pay individual income tax in accordance with the item of "Interest, Dividend and Bonus Income".

(II) Enterprises have the obligation to withhold and pay the above personal income tax on behalf of the shareholders.

Case 1: Company B is a limited liability company jointly invested by Company A and individual shareholders A, B and C. As of the beginning of 2010, Company B borrowed 3 million yuan, 3.05 million yuan and 2.65 million yuan from its individual shareholders A, B and C respectively, and the above borrowings totaled 8.7 million yuan in May 2012, and the corresponding borrowings were not used for the production and operation of Company B. In February 2013, the tax bureau of City H investigated Company B for alleged tax violations. Tax Bureau filed an investigation and made a tax treatment decision on the suspected tax violation of Company B. Company B was found to have under withheld and paid 1.74 million RMB of individual income tax, and ordered Bohao to make up for the withholding and payment.

According to Article 12(2) of the Individual Income Tax Law, if a taxpayer obtains interest, dividend or bonus income and has a withholding agent, the withholding agent shall withhold and pay the tax on behalf of the taxpayer. In this case, the three investors borrowed money from Company B and did not use it for the production and operation of Company B. The fact that the three investors returned the borrowed money to Company B is clear, but the borrowed money was obviously beyond the current period of the borrowed money in the tax year, and their failure to return the borrowed money on schedule belongs to the taxable behavior of the individual income tax, and Company B, as a withholding agent, shall perform the withholding and payment obligations. According to the provisions of the Tax Collection and Administration Law, if Company B has not fulfilled the obligation of withholding and paying the tax from the beginning to the end, the tax authority shall recover the tax from the three investors and impose a fine of more than 50% and less than three times of the withholding tax on Company B. If Company B has already withheld and not paid the tax, the tax authority may not only order it to pay the tax within a certain period of time, but also impose a daily charge of five ten thousandths of one percent of the late payment tax from the date of the tax payment. If Company B has withheld and not paid the tax, the tax authority may not only order it to pay the tax within a certain period of time, but also impose a late payment fee of five ten thousandths of one percent per day from the date of late payment. If the tax authorities order the payment of the tax by a deadline and the tax remains unpaid after the deadline, with the approval of the director of the tax bureau (branch) above the county, the tax authorities may take compulsory enforcement measures such as seizure and detention. If the withholding agent constitutes tax evasion, it will also be subject to a fine of not less than 50% and not more than five times of the unpaid or underpaid tax, or even be held criminally liable for tax evasion.

(III) How to settle the tax not withheld and paid by the enterprise in accordance with the law when the enterprise is dissolved and liquidated?

Once an enterprise is dissolved and liquidated, the fines incurred by the enterprise for failure to withhold and pay taxes and for tax evasion shall be treated as ordinary claims of the enterprise and finally settled before the distribution of the remaining assets to the investors; and the taxes to be paid by the enterprise for the withholding and non-payment of taxes shall be settled in accordance with the order of the tax arrears of the previous years. In the dissolution and liquidation procedure, there is no insolvency of the enterprise, and all kinds of claims of the enterprise shall be fully satisfied, but if the enterprise is found to have insolvency reasons during the liquidation process, it shall be transferred to the bankruptcy and liquidation procedure. Among them, there is a certain controversy in practice as to whether the late payment fees arising from unpaid taxes belong to tax claims with priority or ordinary bankruptcy claims. It is generally believed that, according to the Reply of the Supreme People's Court to the Question of Whether the Claim Confirmation Suit Filed by the Tax Authorities on the Late Payment of Unpaid Taxes by the Bankrupt Enterprise Should be Accepted (Fa Shi [2012] No. 9), the late payment of unpaid taxes by the bankrupt enterprise before the acceptance of the bankruptcy case is an ordinary bankruptcy claim. As for the late payment fees arising from unpaid taxes after the acceptance of the bankruptcy case, the people's court shall deal with them in accordance with Article 61 of the Provisions of the Supreme People's Court on Several Issues Concerning the Trial of Enterprise Bankruptcy Cases, and determine that the corresponding late payment fees do not belong to bankruptcy claims. That is to say, the late payment of taxes does not have the priority of liquidation in the bankruptcy liquidation procedure, and does not even belong to the bankruptcy claim. However, whether it is dissolution liquidation or bankruptcy liquidation, the liquidation group of the limited liability company usually consists of shareholders, and during the liquidation period, the liquidation group shall pay the tax owed as well as the tax incurred in the liquidation process in accordance with the law, so as to avoid the subsequent risk of accumulating to itself.

III. Enterprise dissolution, liquidation and write-off, tax-related risks have to be prevented

Enterprises convene a shareholders' meeting, resolved to dissolve the company, after the resolution of dissolution, should be liquidated in accordance with the law, and then apply for deregistration. Otherwise, the company is not liquidated for deregistration, resulting in the company can not be liquidated, creditors have the right to claim the shareholders of the limited liability company liable for the company's debts. Therefore, the dissolution of the company can not not liquidate, more to liquidate according to law. In addition, the enterprise liquidation and write-off should also pay attention to prevent the company may encounter tax-related risks.

(I) the termination of the enterprise in the business period there are two tax reporting obligations

According to the provisions of Article 53 and Article 55 of the Enterprise Income Tax Law, if an enterprise terminates its operation in the middle of a taxable year, it shall take its actual operation period as a taxable year, and the enterprise shall, within sixty days from the date of termination of its actual operation, apply for the enterprise income tax remittance for the current period to the tax authorities.

According to the provisions of Article 1 of the Circular of the State Administration of Taxation on Relevant Issues on Income Tax of Enterprise Liquidation (Guo Shui Han [2009] No. 684), an enterprise shall take the period of liquidation as a separate tax year for the purpose of dissolution and liquidation. Within 15 days from the date of completion of liquidation and before the enterprise is registered for deregistration, it shall submit to the competent tax authorities a tax return on income tax from enterprise liquidation and settle the tax in accordance with the law.

It can be seen that, for an enterprise that terminates its business within a tax year, the relevant regulations on enterprise income tax take the date of commencement of liquidation as the boundary, and formulate two tax periods, namely the "current period of operation" and the "liquidation period", which are independent of each other, and the enterprise is required to carry out remittance and declaration of liquidation income separately. The two tax periods are independent of each other, and enterprises are required to make liquidation payments and declare liquidation income separately.

(II) Income tax treatment of enterprise dissolution and liquidation

According to the Circular of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax Treatment of Enterprise Liquidation Businesses (Cai Shui [2009] No. 60), if a limited liability company makes a resolution on dissolution and liquidation, it shall carry out tax treatment according to the law in the following order:

(1) Determine the scope of all the assets of the enterprise and recognize the income from asset transfer according to the realizable value or transaction price. Among them, "realizable value" is the value determined by professional appraisal method in accordance with accounting standards, while "transaction price" refers to the income obtained from the actual transaction, which is not fully equivalent to the fair value.

(2) The liquidation group shall liquidate the enterprise in accordance with the law and in a timely manner, end its own business, liquidate its debts and liabilities, deal with the unfinished business related to the liquidation, and pay the taxes owed during the actual operation of the enterprise and the taxes arising from the liquidation process.

After the liquidation is completed, the liquidation income shall be recognized according to the realizable value or transaction price of all the assets of the enterprise, less the taxable base of the assets, liquidation expenses, relevant taxes and charges, plus the gain or loss on settlement of debts, etc. The liquidation income shall be computed and the liquidation income tax shall be paid.

Recognize the residual assets that can be distributed to owners according to the realizable value or transaction price of all the assets of the enterprise, less liquidation expenses, employees' salaries, social insurance costs and statutory compensation, the balance after settlement of liquidation income tax, taxes owed from previous years, and settlement of the enterprise's debts, and calculate individual income tax under different circumstances:

(1) The portion equal to the portion of the liquidated enterprise's accumulated undistributed profits and accumulated surplus reserves calculated in proportion to the shares held by such shareholder shall be recognized as dividend income and individual income tax shall be withheld and paid on behalf of the shareholder.

(2) The portion of the remaining assets less dividend income that exceeds or is less than the cost of the shareholder's investment shall be recognized as the shareholder's income or loss from the transfer of investment, and individual income tax shall be withheld and paid on behalf of the shareholder.

The tax basis of the assets distributed by the shareholders of the liquidated enterprise from the liquidated enterprise shall be determined on the basis of the realizable value or the actual transaction price.

(III) Enterprise write-off does not extinguish the tax obligations that have arisen

As a matter of fact, enterprise write-off does not have the effect of eliminating all legal relationships to which the enterprise is a party. Enterprise liquidation for deregistration, must first cancel the tax registration, before applying for deregistration of enterprises. Enterprises in the tax deregistration information is complete, the tax department to obtain the immediate issuance of the tax clearance instruments, not to mention, usually there will be no residual tax issues. However, if the audit of the tax authorities finds that the enterprise owes tax during the period of existence after the enterprise is written off, according to the provisions of Article 19 and Article 20 of the Provisions of the Supreme People's Court on Several Issues on the Application of the Company Law of the People's Republic of China (II), if the shareholders of a limited liability company fraudulently obtain the company registration authority to apply for the legal person's registration for write-off with the false liquidation report after the company is dissolved or if the enterprise applies for the shortages of immediate processing and the application of simplified write-off procedures, it is not necessary to apply for tax write-off. If the shareholders of a limited liability company make a false liquidation report to cheat the company registration authority to apply for legal person cancellation registration after the dissolution of the company, or if the enterprise applies for immediate or simplified cancellation procedure by applying for tolerance of deficiencies, or if the enterprise violates the promise made to the tax authority to make up all the information and complete the relevant matters, or the promise made to the public announcement of all the investors, even if the company has already been dissolved and cancelled, the tax authority can still penetrate the "corporate veil", and recover the tax and late payment from the original shareholders through litigation. Therefore, after the enterprise is canceled, the shareholders still face the following tax risks:

(1) Risk of tax reimbursement and late payment to shareholders

Case 2: In September 2022, K Municipal Inspection Bureau made a Notice of Tax Matters to J Company, which considered that J Company registered 35 million shares of unlimited outstanding shares of the listed company held by J Company into the names of its five natural person shareholders by way of non-transaction transfer of securities, and there was underpayment of EIT, and it should make up for the EIT tax for the year of 2021, which was RMB 134 million. In view of the fact that Company J has been deregistered, the enterprise income tax payable was recovered from the five natural person shareholders in proportion to the shareholders' investment.

In practice, the tax authorities usually apply the indefinite recovery provisions for tax evasion cases to recover taxes from enterprises that have been written off. Even if an enterprise completes the tax clearance and deregistration procedures, its tax obligations that have been established but not yet fulfilled are not extinguished as a result. In particular, the simplified cancellation of the enterprise, the shareholders of the enterprise to apply for cancellation of the debt before the registration of the debt has not occurred, or the debt has been liquidated, there is no unsettled liquidation costs and other matters such as commitment, but the tax audit found that the tax arrears, in accordance with the provisions of Article 236, paragraph 3, of the draft second review of the Company Law, the shareholders shall be jointly and severally liable for the debts before the cancellation of the registration of the debt, increasing the risk of back taxes, late payment fees.

(2) Compulsory restoration of tax registration for canceled companies

Case 3: In August 2022, D Municipal Taxation Bureau issued a Notice of Tax Matters to M Company, which considered that M Company was suspected of tax evasion and required it to go through the procedure of resuming tax registration and cooperate with the tax authorities in the investigation. Otherwise, the tax authority will force the resumption of tax registration and transfer it to the inspection department for processing.

According to the current legal provisions, the tax authorities require enterprises to resume tax registration lack of legal basis, even if the tax registration is resumed, the tax authorities are unable to take the enterprises that have been registered for business cancellation as the eligible administrative relative. However, the survival of tax registration is not a necessary condition for the tax authorities to recover the tax arrears. As mentioned above, the tax authorities may still recover the tax arrears from the original shareholders if there are circumstances such as concealing the true situation and fraudulently obtaining the deregistration of the enterprise when it handles the deregistration.