Companies with subsidiaries in China enjoy the benefit of its large, developed markets. However, repatriating profits can be difficult if the foreign company is unaware of the right channels of China profit repatriation. In this guide, we’ll discuss how to repatriate profits from China and requirements relating to repatriation.
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China Profit Repatriation: An Overview
The laws and regulations in China relating to foreign exchange are stringent. The government closely regulates the flow of funds in and out of the country. There are several restrictions under Chinese company law, tax laws, and transfer pricing norms on profit repatriation.
A foreign business that wishes to set up its operations in China must be aware of these norms and prepare a robust strategy to repatriate its profits. Without a proper plan, the company may face several issues in sending its earnings back to its native country.
The State Administration of Foreign Exchange supervises the movement of funds in and out of China. There are different ways of China profit repatriation; however, for companies, the most preferred method is repatriation through the issuance of dividends.
Repatriation of Profits Through Issuance of Dividend
A company can repatriate its dividends annually. For this, the company must fulfill certain conditions and submit the requisite documents. The banks in China will also need the company to have all the required documents in place before they can begin the repatriation process. The process of China profit repatriation through dividends can be lengthy and take up to two-four weeks.
Conditions for China Profit Repatriation
To repatriate its profits to its parent company, a foreign subsidiary in China must fulfill the following conditions:
- The company must pay a 25% corporate income tax on its earnings.
- It must get its external annual audit done by a Chinese accounting firm.
- The company must settle any pending income tax liabilities.
- It must settle any losses which have been carried forward from previous years of conducting business in China.
- It must keep at least 10% of its after-tax profits in a reserve fund, with an accrued reserve fund of at least 50% of its registered capital.
The amount that remains is the distributable profits from which a withholding tax is deductible from the dividend can be sent back to the investors. The rate of this withholding tax and other terms relating to it also depends upon the tax treaty or agreement between the company’s native country and China.
The business may apply with its local tax authority to reduce the rate of withholding tax. However, there is no guarantee of getting a reduced tax rate as the tax authority may not accept such requests.
Documents Needed by Banks to Process Dividend Payments
Banks in China require the following documents to process a request of China profit repatriation:
- The business license of the company.
- The recent audit report on the company’s paid-in capital.
- The report of an external auditor.
- The company’s certificate of tax registration.
- Receipts of tax payable.
- A board resolution of the company for its profit distribution
Alternative Ways of China Profit Repatriation
Paying Royalty Fees
An alternative to the issuance of dividends is to pay royalty fees to the foreign parent company. This way, the company does not have to pay any withholding or value-added-tax. However, this method of China profit repatriation is heavily monitored and involves multiple formalities and costs.
The foreign company also requires many documents to prove the transaction price to the Chinese tax authorities. These documents may include a well-drafted contract, tax registration certificate, and commercial invoice between the subsidiary and the parent company.
Issuing Intra-Company Loan
Another way of profit repatriation is to issue an intra-company loan to the parent company. However, this is only a temporary transfer of profits as the parent company needs to transfer the money back to its Chinese subsidiary.
For issuing intra-firm loans, the Chinese subsidiary must be an equity relationship with the partner company. The interest rate of this loan must also be set under the current market standards. This way, repatriating its profits can cost more to the parent company than the actual profits earned.
Monitoring of Profit Repatriation by the Chinese Authorities
The State Administration of Foreign Exchange can stop a company from repatriating its funds out of China. It may happen even if the company fulfills all the conditions and prepares all its documents. The SAFE may prevent the transfer and commence an investigation in the transfer of funds if the company’s profits are not in line with the industry standards. The authority requires the company to have all its documents in place and function most transparently and openly to approve such transactions.
Funds Repatriation for Individuals
Unlike other foreign currencies, a company cannot transfer the RMB directly. The currency must be exchanged into a foreign currency before transferring it out of the country. Additionally, there are certain transfer limits imposed on individuals. For funds repatriation, an individual must fulfill the following conditions:
- The individual must have a work permit and have a job in China.
- Individuals with a resident visa cannot transfer funds overseas.
- The individual needs to apply with the State Administration of Foreign Exchange to send money out of China.
- Required documents include the individual’s passport, employment agreement, business license, and tax receipts.
- The applicant needs to pay the application fee, commission to the bank, and a transfer fee to repatriate funds.
- The applicant may transfer funds via different foreign exchange agencies in China and pay additional fees to such agencies.
A foreign company with a Chinese subsidiary must have a proper repatriation strategy in place to ensure an uninterrupted China profit repatriation. This way, the business will have a plan to mitigate any errors and administrative issues or delays. Since the State Administration of Foreign Exchange can stop funds repatriation, the company must adhere to all the documentation, taxation, and other legal compliance to minimize the chances of government scrutiny.
Horizons is a well-known PEO in China and can help you with your employment management, payroll processing, market-entry, business incorporation, and immigration needs. We can also make China profit repatriation easier for you by eliminating the need to set up a local legal entity.
With Horizons, you can easily set up a foothold in China and manage your employees remotely from your native country.
Contact us today to simplify the way you expand globally and streamline your HR functions, expansion, and funds repatriation in China.