A common challenge for Foreign Invested Enterprises (FIEs) in China is to determine how to repatriate their profits out of the country. Because of China's policies regarding foreign exchange controls, profit repatriation can be considered a difficult challenge. It is important that companies have a good understanding of what is possible and what is not, to make sure they repatriate their profits most efficiently outside China.
In this article we will dive deeper into how to repatriate profits by issuing dividends to the parent company.
If you are interested in other Profit Repatriation methods, please download our Profit Repatriation White Paper
Preparation of Documents: a foreign invested enterprise needs to prepare 1) audit report, 2) annual CIT filing, 3) foreign exchange registration certificate, 4) Articles of Association, 5) profit distribution resolution, and 6) tax registration certificate. In practice, profits are generally allowed to be distributed by June/July when the annual audit is completed.
Dividend Decision: the Executive Director or Board of Directors have to sign an official resolution to decide the amount of dividend to be issued.
Application and Approval: due to foreign exchange controls, companies must obtain approval from the SAFE to remit funds out of China. Also, a foreign company in China must apply for the preferential tax rate under a DTA (this rate is not automatically granted). This may require various additional documents (i.e. tax resident certificate) to claim the preferential rates as from the double taxation agreement.
Payment of Dividends: if the above procedure is completed, you are able to proceed with the dividend distribution overseas transaction at your bank in China.
Please find below an example on how dividends are calculated and distributed within China:
Example of Dividend Distribution
Our sample company was set up in 2015. You can see the company's after CIT profits below.
I. Accumulated Net Profit = 600,000 - 200,000 - 300,000 = 100,000
II. Company Reserve Funds 10% = 100,000 * 10% = 10,000
III. Repatriable Profit = 100,000 - 10,000 = 90,000
IV. Withholding Tax (10%) = 90,000 * 10% = 9,000
V. Dividends received by Parent Company = 90,000 - 9,000 = 81,000
Before deciding which strategy to use for repatriating profits out of China, it is important to consider each option and calculate the respective tax burdens, which would make most sense for your business. MS Advisory has assisted a large number of clients determine their profit repatriation strategy, and actively helped them to reduce their tax burden. If you have any questions about this subject, please do not hesitate to contact us at email@example.com.
For more information on Profit Repatriation, please download our Profit Repatriation White Paper