How to bring profits home from China with less hassle
Investors care about how much profit they make from an investment and how long it takes to repatriate the profit. That’s especially true for foreign investments.
China’s strict foreign exchange control, in particular, has been a common concern among foreign investors. Luckily, there’s more than one way to repatriate profits from China. And companies can use a combination of methods to reach their profit goals.
Know the pros and cons of each approach to help you bring profits home from China and avoid unpleasant surprises.
Dividend distribution
Dividend distribution is the most common way to distribute profits. However, it’s subject to various prerequisites and not all profits can be repatriated.
The following conditions must be met for a foreign subsidiary in China to pay dividends to its parent company:
- The registered capital must be funded in a timely manner under the company’s article of association.
- A 25% corporate income tax must be paid on earnings and any pending income tax liabilities must be settled.
- A company can only distribute dividends out of accumulated profits. If there is an accumulated loss carried forward from a prior year, it must be settled.
- You must have an external annual audit done by a Chinese accounting firm.
- A wholly foreign-owned enterprise must place at least 10% of its annual after-tax profits in a reserve fund until it reaches 50% of the registered capital.
- A 10% withholding tax is generally applied to a dividend distribution to a foreign investor. However, if the foreign investor is a qualified beneficial owner of a tax treaty between the foreign investor’s native country and China, the withholding tax rate could be lowered.
In China, the State Administration of Foreign Exchange (SAFE) administers foreign exchange control regulations and supervises the movement of funds in and out of China. To make the administration more efficient, SAFE delegated many of its review and approval powers to banks, including profit distribution.
Banks require specific documents from the Chinese subsidiary to process dividend payments, including but not limited to, a business license, an annual external financial statement audit report, an audit report of paid-in capital, a board resolution on the dividend payment, a certificate of tax filing and tax payment receipts.
Royalty or service fee payment
Intercompany payments, such as royalties or service fees, are another way for multinational companies to repatriate profits. Compared to dividend distribution, intercompany payments have fewer prerequisites. However, transfer pricing can become an issue.
Transfer pricing generally bears more risk for a tax audit since related party transactions are strictly regulated and the pricing is required to meet the “arms-length” standard. It’s important to keep contracts, invoices and detailed transaction documents between the companies to demonstrate the legitimacy of transactions (if challenged).
Withholding tax and value-added tax are generally applicable to royalty or service fee payments to a foreign person.
Loans to the foreign parent
A Chinese subsidiary may issue funds to a foreign parent through a loan arrangement. This would be temporary repatriation since the loan is expected to be paid back to the Chinese subsidiary within five years and interest must be charged at an arms-length rate.
Some prerequisites also need to be met:
- The borrower and lender must have an equity relationship.
- The Chinese entity must be established for 1 year before it can make loans.
- Both the Chinese entity and the foreign parent must have a good record in complying with the foreign exchange rules.
- A SAFE examination and approval are required if the lending amount exceeds 30% of the owner’s equity.
How Wipfli can help
Planning early helps companies meet their repatriation and profit goals. The international expansion specialists at Wipfli are well versed in repatriation methods and their advantages, and they’re ready to help you create an optimal global tax structure. For help, contact us today.
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