ECOVIS Focus Hong Kong

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

Short term rental regulations Czech Republic: What landlords need to consider in the future

26.11.2024

In October 2024, the Czech Ministry of Regional Development issued a regulation on short-term rentals. The new methodological guide to clarify the rules for short-term rentals applies in particular to apartments offered on platforms such as Airbnb. The Ecovis experts know what landlords must prepare for.

As formal legislative amendments are in process, this current guideline serves as an intermediary step, helping authorities distinguish between rentals and accommodation services.

Defining rental and accommodation services

A key component of the Ministry’s methodology is the clear distinction between “rental” and “accommodation” services, each carrying different regulatory requirements. Under current Czech law, long-term rentals fulfil the tenant’s housing needs and typically require less regulatory oversight. In contrast, accommodation services, such as those provided through Airbnb, satisfy only temporary accommodation needs and are considered as business activity. This classification requires providers to adhere to stricter business regulations, including obtaining a business license, registering guests, and potentially paying VAT and local accommodation fees. The methodology thus helps clarify that short-term rentals intended for temporary stays fall under accommodation laws and not housing rental laws.

Do you provide housing? Get advice from experts to ensure the new requirements are implemented correctly.

JUDr. Mojmír Ježek, Ph.D., Partner, ECOVIS ježek, advokátní kancelář s.r.o.

Requirements for Airbnb premises

According to the Ministry’s guidance, premises used for short-term accommodation must be licensed and properly categorised as “accommodation units” under the Czech Building Act. This requirement contrasts with standard apartments, which are designated for residential use. Building authorities can inspect properties and issue fines if they identify non-compliance. For instance, a property classified as residential cannot legally operate as an Airbnb without first obtaining a re-licensing permit as an accommodation unit. The Ministry also claims that the case of use “only to a minimal extent (both in area and time) for accommodation purposes” and further use by the landlord for living purposes, may mean that these stricter requirements may not be fulfilled.

For further information please contact:

JUDr. Mojmír Ježek, Ph.D., Partner, ECOVIS ježek, advokátní kancelář s.r.o., Prague, Czech Republic
Email: mojmir.jezek@ecovislegal.cz

Uruguay free trade zone: A unique opportunity to invest

25.11.2024

Free trade zones are particularly well-known and popular because of their tax advantages. In Uruguay, a company that operates in a free trade zone is exempt from paying all current or future national taxes. The Ecovis experts know what other advantages there are for multinational companies that want to settle in a free zone.

There are different types of free trade zones depending on the type of activity that can be carried out, which can be industrial, commercial, or services. In Uruguay, the government declared the free trade zone regime to be of national interest, which reflects the interest and support for the activities carried out there. As a result, Uruguay has 14 free trade zones in different parts of the territory, with a wide variety of sectors and companies.

Uruguay’s Law 15,921 declares “the promotion and development of free zones is of national interest, with the objectives of

• promoting investments,
• diversifying the productive matrix,
• generating employment,
• increasing the capabilities of the national workforce,
• increasing national added value,
• promoting activities with high technological content and innovation,
• promoting the decentralization of economic activities and regional development, and in general terms
• favour the insertion of the country in the dynamics of international trade in goods and services, and international investment flows.”

Being a regime of national interest guarantees the support of the government and the reliability of the regime in a country that also stands out in the region for its political, economic, and social stability, which makes it an attractive and safe destination to invest.

We will open an office in a free trade zone by the end of 2024. This will enable us to offer our services such as auditing, tax and management consulting or process outsourcing, to those companies that are in Uruguayan free zones or in other countries.

Cristina Caiafa, Advisory services, ECOVIS Uruguay, Montevideo, Uruguay

Additional advantages for companies in free trade zones

In addition, it is important to highlight that the regime allows the possibility of hiring up to 25% foreign personnel, which allows qualified people to be brought in from abroad to train local employees. Also, although the regime establishes that the operations of free trade zone users must necessarily be carried out within the territory of the free trade zone, the rule was made more flexible as a result of the COVID pandemic to incorporate the option of home office. This recognises the new reality of working life, but is limited to 90% of staff completing 60% of their working time in person within the free trade zone.

Free trade zones in Uruguay are very attractive for companies, and many multinationals have already chosen Uruguay as the location for their regional hubs or shared services centres.

For further information please contact:

Cristina Caiafa, Advisory services, ECOVIS Uruguay, Montevideo, Uruguay
Email: cristina.caiafa@ecovis.uy