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How to manage tax risk in China

02.12.2024

Companies, as well as private individuals, must manage their taxes in order to be able to identify and contain potential risks. The penalties for mistakes are harsh and fearsome. The Ecovis experts explain how tax risks can be managed in China.

The world of tax and audits in China not only involves the tax office. There is also a broad collaboration that includes the Ministry of Public Security, China Customs, the People’s Bank of China, the Supreme People’s Procuratorate and the State Administration of Foreign Exchange.

Risk prevention and control

Within a company, alongside the financial officer and legal representative, the shareholder(s), as well as those who write invoices and prepare the tax, are responsible for risk-prevention and control. To identify tax issues in a company, it is first necessary to understand how the tax audit procedure works.

In the context of big data, tax audit procedures follow a structured process. First, an electronic system automatically collects and analyses data, identifying potential tax risks. When issues are flagged by this system, the tax authority informs the taxpayer about these specific concerns. Following this notification, a tax audit or inspection is conducted to examine the taxpayer’s records in detail. Based on the findings, the taxpayer is required to file any outstanding taxes and pay late payment interest, if applicable. Finally, if the taxpayer disagrees with the audit result, they may seek administrative reconsideration of the decision.

Companies should ensure that all information on taxes and audits is consistent and logically linked. We can provide support with tax check-ups.

Pingwen Hu, Senior Partner and Certified Public Accountant, ECOVIS Ruide Certified Public Accountants Co., Ltd, Shanghai, China

How to identify potential tax problems

Based on our extensive experience, companies should:

• Evaluate their own operations: Assess whether there are any unusual business activities, and review the company’s growth and overall position within the industry (e.g., excessive profits or prolonged losses).
• Examine VAT invoices: Identify any discrepancies in input and output data, spot abnormal invoices, or note any inconsistencies between the goods received and invoiced amounts.
• Facilitate interdepartmental information sharing: Review information from various government departments and analyse bank statements alongside business data to ensure alignment and accuracy.

For further information please contact:

Pingwen Hu, Senior Partner and Certified Public Accountant, ECOVIS Ruide Certified Public Accountants Co., Ltd, Shanghai, China
Email: pingwen.hu@ecovis.cn

Global minimum tax Brazil: Government proposes additional taxation

29.11.2024

Multinational companies with a global annual turnover of more than EUR 750 million will have to pay an additional social security contribution on their net profits (CSLL) in Brazil from the 2025 tax year. Affected companies should therefore review their tax planning strategy. The consultants at Ecovis know the details of the new global minimum tax.

Provisional Measure No. 2,265 of 2024 aligns Brazilian tax rules with international standards by adopting Pillar 2 of the OECD’s Global Anti-Base Erosion (GloBE) rules, which sets a minimum income tax rate of 15% for all jurisdictions in which business entities operate. This additional taxation will take effect from the 2025 tax year, with payments expected by the last business day of July of the following fiscal year.

With the introduction of the CSLL in Brazil, multinational companies must rethink their tax planning strategy. We can support them in this.

Mauricio Nucci, Partner Tax Law, Vaz de Almeida Advogados – Member of ECOVIS International, Sao Paulo, Brazil

The background for the additional social security contribution

This measure is aimed at curbing fiscal competition among countries by imposing a minimum tax across jurisdictions. Essentially, GloBE rules discourage profit remittance to countries offering tax benefits that artificially suppress or reduce the tax incidence on profit. In addition, the Government also issued Normative Ruling RFB No. 2,228, which regulates the matter within the scope of the Brazilian tax administration and includes an additional Social Contribution on Net Profit (CSLL).

As a provisional measure, the Government’s proposal must be confirmed by Congress within 120 days from its publication. If not confirmed within the legal period (or if rejected by the Federal Legislature), the provisional measure will automatically lose its effect.

How to calculate the CSLL surcharge

The calculation for the base amount for the CSLL takes into account the sum of a company’s taxes and its adjusted income or loss attributable to the jurisdiction for the fiscal year. If the rate falls below 15%, the tax will apply to the so-called company excess profits. Excess profits are determined from the company’s net profit, adjusted by excluding amounts related to tangible investments and payroll expenses.

It should be noted that companies subject to the CSLL surcharge who fail to provide information within the defined deadlines will face a fine of 0.2% of total revenue for each month of delay, up to a maximum of 10% of total revenue or BRL 10 million, plus a penalty of 5% of the omitted, inaccurate, or incorrect amount.

For further information please contact:

Mauricio Nucci, Partner Tax Law, Vaz de Almeida Advogados – Member of ECOVIS International, Sao Paulo, Brazil
Email: mauricio.nucci@vazdealmeida.com

Rafael Maniero, Tax Law Attorney, Vaz de Almeida Advogados – Member of ECOVIS International, Sao Paulo, Brazil
Email: rafael.maniero@vazdealmeida.com

Corporate law in China: Liability risks under the new law

28.11.2024

As of 1 July 2024, China’s revised corporate law imposes stricter liability rules for directors and board members, significantly heightening personal accountability for violations of duties and laws. This change amplifies transparency and due diligence obligations while subjecting directors to stricter oversight.

Directors are now required to act in accordance with the law and the company’s articles of association (AoA), or risk being held personally liable for company losses resulting from their actions, say the Ecovis advisors. Expanded duties of loyalty and care are now codified (e.g., Articles 180, 188), with directors obligated to report personal transactions that could impact the company, subject to shareholder or board approval (Articles 182-184).

What changes under the new corporate law in China

Directors can face personal liability in cases such as:

1. Abuse of their position through embezzlement, bribery, or unlawful disclosure of sensitive information (Art. 181).
2. Failing to promptly identify and collect overdue or insufficient shareholder contributions, causing company losses.
3. Collective compensation responsibilities if shareholders unlawfully withdraw capital (Art. 53).
4. Facilitating a third-party’s share acquisition that results in company losses.
5. Premature profit distribution without offsetting prior losses or creating required reserves (Art. 211).
6. Illegally reducing registered capital, leading to company losses (Art. 226).
7. Failing to initiate timely liquidation, resulting in compensatory liabilities (Arts. 232, 234-238).

Liability can extend to internal and external claims:

• Internally, shareholders can sue directors for damages due to misconduct (Arts. 188, 189).
• Shareholders may file direct civil suits for personal losses caused by directors violating laws or AoA provisions (Art. 190).
• Externally, third parties can claim damages for grossly negligent or intentional breaches by directors (Art. 191).

We recommend that companies hold a board meeting at least once a year to minimise liability risks.

Richard Hoffmann, Lawyer, ECOVIS Rechtsanwaltskanzlei Richard Hoffmann, Heidelberg, Germany

Chinese sanctions partly also recognised in Germany

In severe cases, financial and criminal penalties may be imposed. Similar to German law, personal liability for directors exists in both jurisdictions. Breaching duty of care or loyalty can lead to “piercing the corporate veil,” allowing access to personal assets in cases of abuse, such as asset commingling.

While no treaty exists for mutual recognition of court judgments between China and Germany, certain judgments might still be acknowledged under the principle of reciprocity. Misconduct can result in additional repercussions, including travel restrictions, such as visa denials or entry bans. Directors already in China facing investigations might encounter exit bans.

Both Chinese and German corporate laws impose personal liability on directors. The latest changes in China create significant risks, emphasising the importance of adhering to duties and conducting thorough compliance reviews to mitigate potential liabilities.

For further information please contact:

Richard Hoffmann, Lawyer, ECOVIS Rechtsanwaltskanzlei Richard Hoffmann, Heidelberg, Germany
Email: richard.hoffmann@ecovis.com