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.
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Requirements for Repatriating Dividends
Both Wholly Foreign-Owned Enterprises (WFOE) and Joint Ventures (JV) can repatriate their after-tax profits back to their overseas investor. Before you would be able to repatriate dividends out of China, there are several requirements to take in mind, which are:
The registered capital contributions as stated in the Articles of Association should be fulfilled. This would generally mean that all the registered capital must be provided (and a capital verification report must be completed as well). However, within the regulations of the State Administration of Foreign Exchange (SAFE) it is mentioned that the capital contribution schedule as determined in the AoA needs to be paid up, which would also provide the opportunity to issue dividends even if not all registered capital has been paid up. Further clarification would best be consulted with your in-charge tax officer.
Dividends may only be issued when the accumulated losses of previous years have been made up. The remaining positive balance may be repatriated.
Profits can only be repatriated after the firm has undergone the annual audit and completed the annual Corporate Income Tax (CIT) filing at the local tax authority.
Before issuing dividends, the company is obliged to put 10% of the after-CIT profit in a company reserve fund, until the total amount of reserves reaches 50% of the registered capital of the firm.
China levies withholding tax on dividends issued to foreign investors. A withholding tax is an enterprise income tax levied on non-resident enterprises without permanent establishment in China that generate China-sourced income.
The standard withholding tax for dividends in China is 10%. Depending on the Double Tax Avoidance Agreements (DTA) between China and the country of the investor, the amount of dividend withholding tax may be reduced to a lower rate. For instance, the DTA between Hong Kong and China would provide a dividend tax rate of 5%.
Dividend Distribution Procedure
When a firm chooses dividend distribution as its profit repatriation strategy, this firm must to follow the steps below in order to remit dividends out of China:
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 firstname.lastname@example.org.
For more information on Profit Repatriation, please download our Profit Repatriation White Paper