Repatriating funds out of China is considered a strenuous challenge due to China’s foreign exchange controls it is important for companies with operations in China to develop a sound profit repatriation strategy. In addition, foreign companies are often unaware of the taxation impact of their chosen profit repatriation strategy nor are they often aware of the advantageous taxation rights they are entitled to per various Double Tax Avoidance Agreements (DTAs).
We support our clients with all known strategies to repatriate profit out of China, advise on the tax impact, requirements and procedure of the chosen profit repatriation method and support with the application of advantageous taxation as per existing DTAs. We further specialize in the development of a China profit repatriation strategy tailored to the requirement of our clients.
Our profit repatriation service offering includes support with:
When a Chinese subsidiary makes a profit, it can issue a share of this profit as dividend to its shareholders. However, in order to repatriate dividends out of China, there are several rules with which the company must comply. As such, we support not only with the procedures for actual dividend distribution, but as well advise on the requirements of a dividend distribution to ensure all pre-requisites for a dividend distribution are met and the Chinese subsidiary remains fully compliant.
Another profit repatriation strategy involves the payment of services fee from the foreign-invested entity in China to its parent company, of which examples are marketing service-, management services-, or technical service agreements among others. When opting for the payment of service fees it is important to pay attention to the nature of the services and the consequences of the possible constitution of a Permanent Establishment. We have vast experience advising our clients from all over the world regarding the procedure and taxation consequences of working with service fee payments.
Royalties are payments charged for the use of intellectual property, copyrighted works, franchises or natural resources. When charging royalties to a Chinese subsidiary, a royalty agreement has to be drafted and submitted to the trademark bureau. Furthermore, in order to receive the royalties, the parent company must be deemed the beneficial owner of the royalties. We have successfully supported numerous clients with the registration of royalties with Chinese authorities and payment of royalty fees to the headquarter abroad.
Other Profit Repatriation Methods
In addition to the aforementioned most common methods to repatriate profits from China, we also support with:
- Reimbursements of costs incurred by the investor on behalf of the Chinese subsidiary.
- Refunding profits by way of interest payments on an inbound loan to the Chinese subsidiary.
- Outbound intercompany loans from the Chinese subsidiary to the shareholder abroad.
Withholding Taxes in China
Withholding tax is an enterprise income tax levied on non-resident enterprises without permanent establishment in China that generate China-source income. In instances where withholding taxes are levied, the Chinese subsidiary must act as the withholding agent. In the following instances the Chinese authorities would levy withholding taxes:
- Dividend income which is derived from equity investments (in a Chinese subsidiary).
- Income received from royalties.
- Interest income derived from the provision of funds.
- Other income that may be taxable according to the Chinese tax authority.
Double Tax Avoidance Agreements (or DTAs) may stipulate beneficial withholding tax rates that may apply, and therefore foreign investors should carefully study the available DTAs before choosing a profit repatriation strategy.
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