I. Introduction

　　Capital reduction is an important commercial practice for enterprises to optimize capital structure and adapt to the adjustment of business strategies. Compared with that of ordinary enterprises, the capital reduction procedure of foreign-invested enterprises (FIE) are more complicated, as it involves multiple regulatory dimensions such as cross-border capital flow, foreign investment access, foreign exchange control and cross-border taxation, making it a key and difficult issue in the field of commercial compliance. Based on a recent case of capital reduction of a foreign-invested enterprise handled by our team, in accordance with the Company Law of the People's Republic of China (hereinafter referred to as the "Company Law") and relevant laws and regulations on foreign exchange administration and taxation, this article systematically sorts out the statutory procedures, special procedures and practical key points of capital reduction of FIEs, so as to provide operational guidelines to FIEs to complete capital reductions in a legal and compliant manner.

　　II. Procedures for Capital Reduction of FIEs

　　1. General Procedures for Capital Reduction

　　In accordance with the relevant provisions of the Company Law, any company that reduces its registered capital must complete the following five basic procedures, which also apply to FIEs:

　　(1) The shareholders' meeting adopts a capital reduction resolution. Capital reduction is a major capital change matter of the company, which must be voted on and adopted by the shareholders' meeting in accordance with the law. The resolution shall specify core elements such as the amount of capital reduction, the method of capital reduction and the implementation period, thereby constituting the internal decision-making basis for the lawful initiation of the capital reduction.

　　(2) The balance sheet and the statement of assets shall be well prepared. The company must comprehensively review its assets, liabilities, and equity to objectively reflect its true debt-repayment capacity, thereby providing a financial foundation for following creditor protection.

　　(3) The creditors shall be informed and a public announcement shall be made in accordance with the law. The company shall notify all its known creditors within 10 days from the date of adoption of the capital reduction resolution and make an announcement in newspapers or on the National Enterprise Credit Information Publicity System within 30 days, so as to ensure that creditors are promptly informed of the capital change.

　　(4) The company shall either pay off the debt or provide proper guarantees. Upon receiving a request from a creditor, the company may choose to settle the relevant debt in advance or provide effective property guarantees to prevent the capital reduction from harming the creditors’ legitimate rights and interests.

　　(5) The alteration registration with the Administration for Market Regulation (“AMR”) shall be completed. After completing the internal decision-making and creditor protection procedures, the company shall apply to the AMR for alteration registration of registered capital and update the commercial public record to give the capital reduction legal effect externally.

　　2. Special Procedures for Capital Reduction of FIEs

　　In addition to the basic procedures above, the FIEs must complete the following special procedures in sequence due to the cross-border remittance of capital reduction funds:

　　(1) Tax Filing for Outbound Payment and Tax Declaration

　　Whether a capital reduction gives rise to a tax liability depends on the classification of the assets received in connection with the reduction. According to the Announcement of the State Administration of Taxation on Several Issues Concerning Enterprise Income Tax (Announcement No. 34 of the State Administration of Taxation [2011]), and the Enterprise Income Tax Law of the People's Republic of China and its implementation regulations and other provisions:

　　◈If the assets recovered from capital reduction only include the initial capital contribution, and do not involve dividend income such as profit-converted registered capital, the portion of accumulated retained earnings and accumulated surplus reserve calculated according to the proportion of reduced paid-in capital, or other amounts that shall be recognized as gains from the disposal of investment assets, then no tax is payable;

　　◈If the reduced registered capital includes the portion of profit reinvestment, such portion of capital reduction shall be regarded as profit distribution and is subject to taxation in accordance with relevant regulations; the FIEs must withhold and remit corporate income tax at a rate of 10%.

　　In practice, when handling tax declaration online, it is important to pay the application taxes within the filing period to avoid late payment penalties that could adversely affect the company’s tax credit rating. Only after completing the tax payment (if applicable) and filing the necessary documentation for outbound tax payments can the next step be taken: applying to the foreign exchange authorities or a bank to remit the capital reduction funds overseas.

　　(2) Alteration Registration for Customs

　　Within 30 days after the completion of registration with the AMR, the FIEs must apply to the customs authority where it originally filed its customs record to update its registered capital information. The specific procedure is as follows: Log in to the China International Trade Single Window website using the company’s account, submit the change request in the “Import/Export Consignees and Consignors” section, and customs will typically provide feedback on the review results within 3 working days.

　　(3) Application for Remitting Capital Reduction to Overseas Shareholder

　　1) Currency Change

　　It is particularly important to note that if a change in the currency of the registered capital is involved during the capital reduction process—due to considerations such as the final foreign exchange remittance—in addition to filing the corresponding changes with the AMR and customs, the FIEs must first apply to the local State Administration of Foreign Exchange (“SAFE”) for a change in the registered currency before formally applying to remit the capital reduction. Among these steps, determining the reference date for the exchange rate is one of the key points that is often overlooked. Based on our team’s practical experience, the SAFE may require the conversion of the registered capital amount using the mid-market exchange rate on the date the registered capital was recorded in the books, while some banks, when processing the final remittance, require that the converted registered capital amount specified in the company’s articles of association—as filed with the AMR—match the registered capital amount filed with the SAFE. If exchange rates based on different reference dates are used, this may result in a discrepancy between the registered capital amount recorded in the company’s articles of association and the amount filed with the SAFE. Therefore, when changing the currency of the registered capital, the FIEs should communicate thoroughly in advance with the SAFE, AMR, and banks to ensure that exchange rate information is accurate and consistent, thereby effectively advancing the capital reduction process.

　　2) Remittance of Capital Reduction to Overseas Shareholder

　　After completing the aforementioned procedures for changes in business registration, tax registration, customs registration, and currency, the company may apply to a bank to remit the capital reduction. According to the “Notice of the State Administration of Foreign Exchange on Issuing the ‘Regulations on Foreign Exchange Management of Domestic Direct Investment by Foreign Investors’ and Supporting Documents,” the FIEs that needs to remit funds overseas due to a capital reduction may purchase foreign exchange and make outbound payments at a bank after completing the relevant registration procedures. The FIEs should confirm the list of required documents with the bank in advance. Taking the capital reduction projects handled by our team as an example, the following documents are typically required:

　　a. Written application letter;

　　b. Original business registration certificate;

　　c. Application Form for Basic Information Registration of Direct Investment in China (I);

　　d. Updated business license;

　　e. Registration notice issued by the AMR;

　　f. Articles of association filed by the AMR;

　　g. Shareholders’ certificates of incorporation;

　　h. Enterprise credit information publicity report;

　　i. Capital verification report;

　　j. For companies subject to the paid-in registered capital, approval documents or other supporting materials from the industry authority must also be provided.

　　III. Practical Key Points for Capital Reduction of FIEs

　　Based on the analysis above, FIEs should focus on the following practical key points in the capital reduction operation:

　　1. Tax Compliance

　　Companies must accurately distinguish the different natures of income from capital reduction—specifically, initial capital contributions, dividend income, and capital gains—and determine in accordance with the law whether a tax reporting is required, in order to avoid tax underpayments or penalties for late payment resulting from misjudgment. It is recommended to maintain timely communication with the tax authorities and seek professional advice when necessary.

　　2. Multi-department Coordination and Material Consistency

　　Capital reduction procedure by FIEs involves five entities: AMR, tax authorities, customs, SAFE, and banks. Review standards and requirements vary across these departments, and the information sharing system among them is not yet fully established. Companies should review the deadlines and documentation requirements of each department in advance and plan the sequence of procedures accordingly. In particular, exchange rate information must be consistent across business registration or filing, foreign exchange registration, and bank applications.

　　IV. Conclusion

　　Capital reduction for FIEs involves both ordinary commercial adjustments and cross-border capital flows. The procedures encompass multiple areas, including corporate governance, creditor protection, tax treatment, customs changes, and foreign exchange management. The regulatory process is lengthy, with closely interlinked steps and stringent compliance requirements. In practice, FIEs should thoroughly understand all statutory procedures and specific requirements, prioritize early professional communication, coordination, and time management with relevant authorities, and strictly fulfill obligations such as cross-border tax payments, filing and approval procedures, and foreign exchange remittances to ensure that capital reduction is completed legally, orderly, and efficiently, thereby effectively mitigating legal and operational risks.

　　Relevant Laws and Regulations

　　1. Company Law of the People's Republic of China (Revised in 2023), Articles 224 and 225.

　　2. Announcement of the State Administration of Taxation on Several Issues Concerning Enterprise Income Tax (Announcement No. 34 of the State Administration of Taxation [2011]), Article 5.

　　3. Notice of the Ministry of Finance and the State Administration of Taxation on Several Preferential Policies for Enterprise Income Tax, Article 4.

　　4. Enterprise Income Tax Law of the People's Republic of China, Articles 3, 4, 27 and 37.

　　5. Regulations for the Implementation of the Enterprise Income Tax Law of the People's Republic of China (Revised in 2024), Paragraph 1 of Article 91.

　　6. Notice of the State Administration of Foreign Exchange on Issuing the Provisions on Foreign Exchange Administration of Foreign Investors' Direct Investment in China and Supporting Documents, Article 10.

　　Introduction:

　　Xing Zhifan,Senior Partner

　　LL.B. in Law and Business Administration (dual degree), LL.M.; subsequently pursued advanced studies at the University of Cambridge, UK.

　　Ms. Xing focuses on domestic and cross-border commercial dispute resolution, corporate compliance, and labor law, with over a decade of experience in foreign-related legal services. She has assisted clients in handling disputes involving a cumulative total of nearly RMB 10 billion, and has been recognized by Thomson Reuters' Asian Legal Business (ALB)as a "Client Choice Lawyer" in the Yangtze River Delta region. She also serves as a member of the Corporate Compliance Committee of the Shanghai Bar Association, a practice mentor at the International Education College of East China University of Political Science and Law, and a mediator at the Asia Pacific International Arbitration Chamber. Her professional articles have been published in leading domestic journals and magazines.

　　Mobile:+86 18601669710

　　Email:xingzhifan@deheheng.com

　　Wang Jie,Partner

　　Ms. Wang joined the Shanghai office of Beijing DHH Law Firm in 2019. Prior to that, she worked at Chen & Co. Law Firm (EY global alliance law firm) and Transasia Lawyers. Ms. Wang has been practicing Chinese law for more than 15 years and served nearly 100 Fortune 500 companies, institutions, state-owned enterprises, and private enterprises. Ms. Wang specializes in the research and practice of labor law, commercial and cooperate law, providing comprehensive labor legal services to clients, including HR management consulting, internal investigations, overseas anti-corruption training, and employee placement in M&A, restructuring, and bankruptcy liquidation. She is skilled in providing comprehensive legal consulting for all types of companies, including daily compliance advising, reviewing and revising commercial contracts and cooperate governing documents, attending management’s meetings, providing legal support for commercial negotiations and etc.

　　Mobile: +86 17702167513

　　Email:wangjie-sh@deheheng.com