More than ever, companies doing business in China now need to restructure their China business to streamline their organization and make use of cost-saving opportunities. In this article reprinted from China Focus we explain the issues involved with two common procedures:

Merger of Chinese Companies
Since the 1990s, China has gone through accelerated economic growth, with GDP growth averaging 10% (in comparison to Germany’s modest average of 2.5%). Against this backdrop companies have rushed into China to set up their business entities. In many cases regional tax and other incentives were influential in deciding the company’s structure and location. Now that most of the previous investment incentives have faded out, a company should ask itself: Does my current set-up fit my business situation?

There are two methods for merging companies:

1. Absorption – one company absorbs another company. The absorbed company will then be dissolved.
2. Consolidation – two or more companies are combined to form one new company. The existing companies will be dissolved.

The first step is to obtain the approval from the local branch of the Ministry of Commerce (MOFCOM). After the first pre-approval is granted, the companies can then initiate the procedure and receive final approval. Thereafter, all licenses of the dissolved companies have to be deregistered. For the surviving company, the licenses have to be renewed. The creditors of the dissolved company(ies) can ask for repayment of their debt beforehand, unless the company can provide sufficient security for repayment.

It is not unusual for the whole procedure to take more than a year to be completed. One hurdle that is especially sensitive is the tax deregistration of the dissolved company – sometimes tax authorities are reluctant to relinquish a source of regular tax revenue and will delay the procedure.

In both merger procedures, the credit and debt will be succeeded by the surviving company. Prior to the merger, both companies have to contribute the complete amount of registered capital.
A merger is always a complex procedure that requires significant time and effort. It is beneficial if the companies to be dissolved both bring additional value to the overall structure. To just get rid of redundant entities, there are more straightforward procedures available – asset transfers and subsequent liquidation are more frequent in practice.

Transferring Ownership of a China WFOE or a share in a WFOE (JV)
In another circumstance, a company in their home market decides to merge or acquire another company who has operations in China. After the acquisition, the company ends up with a redundant entity in China. What is the best way to handle the China entity?

There are several restructuring scenarios that require a change of shareholders. Here is one example:

Investor  has two subsidiaries in China which are held by two different holding structures – one by the foreign holding company and one by the Hong Kong holding company. To simplify the structure, the investor unifies his holding structure by transferring the ownership of WFOE A to the Hong Kong Company. Now, both WFOEs share the same structure and with it the synergies of being managed by the same company and personnel. In addition, the investor can enjoy (under certain conditions) a reduced withholding tax on dividends remitted out of China.

“Shareholding transfer is subject to tax. China is taxing capital gains derived from the sale of shares in a Chinese company.”

The administrative procedures related to a shareholding   transfer are less complex than a merger transaction and require only six weeks to complete. An approval from MOFCOM needs to be obtained in this case as well.

Caveat: Shareholding transfer is subject to tax. China is taxing capital gains derived from the sale of shares in a Chinese company. The tax rate for non-residential enterprises (foreign holding companies) is 10%. Tax exemption is possible, but only if certain stringent requirements are met. For instance, key business activities cannot be changed within 12 months after the restructure.