Funds repatriation is one of the most common (and frustrating) challenges facing foreign companies in China who rely on financial services in China. But there are reasonable solutions. This article takes a closer look.
Transfer Funds Out of China
Many foreign companies operating in china feel that profit repatriation from China is a challenging task. The main reason is due to a strict policy that tightly regulates cross-border funds flowing. To begin with, profit repatriation is allowed only once a year, and only after the annual financial audit and tax compliance are completed. Also, the authorities might limit the profit amount that can be repatriated, according to the company’s net profit stated in the financial report.
Foreign companies can choose between three main channels to transfer profits. They must carefully consider the pros and cons of every alternative, with regard to their company’s unique situation:
- Paying dividends to the parent company
- Intercompany payments (e.g., service fee, royalty, reimbursement)
- Intercompany loans
Remitting profits as dividends is a customary path opted by many international companies who wish to implement profit repatriation from China. In this channel, surplus is converted into shares that are distributed to the company’s shareholders (based on their proportional ownership of the company). The amount of profits to be distributed as dividends is determined by the company’s Board of Directors/Executive Director.
- The most common and direct way
- Relatively less Chinese intervention, compared to other channels
Dividends payment is subject to several prerequisites and limitations:
- The company’s registered capital amount, as stated in the company’s Article of Association, has to be fully injected.
- Profits can be repatriated only once a year, after the annual audit is conducted and the annual CIT reconciliation report is filed (i.e., after May).
- Accumulated debts and past losses have to be made up.
- The company has to allocate 10% of its profits (after CIT deduction) to a reserve fund. The process continues until the company reaches 50% of its registered capital deposited in the reserve fund.
- A withholding tax is levied on the dividends paid. Its rate (0-10%) depends on the availability and terms of a Double Tax Avoidance Agreements (DTA) between China and the company’s country of origin.
Another alternative for foreign companies operating a WFOE with a business license in China is transferring funds to the parent company by intercompany payments, which include:
- A service fee, for instance marketing, management and technical services
- Royalties, for instance IP and trademarks
- Reimbursements, for instance taxes incurred on employment salaries and IT facilities
- These payments are exempt from the 25% Corporate Income Tax payment
- Transactions can be made based on the company needs, and are not limited to once a year
- There are significantly less restrictions
- Processes are much more controlled and scrutinized (for instance, if the service fee is considered too high and unreasonable by the Chinese authorities, they will impose CIT)
- Service fees and royalties are subject to VAT
Intercompany loans are yet another channel that WFOE accounting can explore. Intercompany loans can be divided into two: inbound loans (in which the parent company lends money to the Chinese subsidiary through interest payments), and outbound loans (in which the Chinese subsidiary lends money to the parent company). This channel is applicable only if there is an equity relationship between the two companies.
- Extension of loans is tax-free (tax is imposed only on the interest)
- Extension of loans can take place in accordance with company needs
- This channel is the most vulnerable to SAFE’s scrutiny
- Both inbound and outbound loans are limited to 30% of the registered capital
- All business-related taxes are imposed on outbound loans
- Outbound loans can be provided only after the first year since the establishment in China
Last updated: July 2022
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