It can be a challenging task for foreign companies operating in China regarding profit repatriation. Essentially, that means that you might have trouble getting your profits out of China. This is largely due to strict policies and regulations on cross-border money transactions.
You are only allowed profit repatriation one time per annum, and that’s only available after the yearly tax compliance and financial audits have been completed.
It’s common for the authorities to limit the amount of profit that can be repatriated that is calculated against the net profit of the company and the info from the financial report.
There are three main avenues to transfer profits if you are a foreign company in China. And it’s important to carefully consider these three options and the pros and cons.
Using Dividend Payments
Passing on the profits as dividends is a standard avenue that is routinely used by foreign companies in China who need to get profit repatriation. By using this method, the surplus is converted into some kind of shares that can be distributed to the shareholders of the company in line with their proportional ownership. The profits can then be distributed as dividends although the exact amounts are decided by the Board of Directors or by the Executive Director of the company.
Pros
- It’s the most direct method.
- There are relatively fewer interventions from Chinese authorities as opposed to other methods.
Cons
There are several limitations and prerequisites when using dividend payments as follows:
- The company must fully inject its registered capital amount in line with the Article of
Association created by the company. - The losses incurred from any accumulated debts from the past need to be made up.
- 10% of the company’s profits must be allocated to a reserve fund after the CIT deductions. This process is then continued up until the point it gets to 50% deposited in the reserve fund of the registered capital.
- There’s a withholding tax on the dividends that are paid with a rate between 0-10% depending on any terms and regulations for Double Tax Avoidance Agreements (DTA) that have been made between the foreign company’s country of origin and China.
Using Intercompany Payments
The next most popular avenue for foreign companies in China that operate with a WFOE and a business license seeking profit repatriation is intercompany payments. And these include:
- Some kind of service fee for marketing, tech, or management services.
- Paid as royalties for using IP, copyrights, and trademarks.
- Some type of reimbursement on taxes incurred on IT facilities or even employment salaries.
Pros
- These types of payments can be exempt from the Corporate Income Tax payment of 25%.
- Transactions can be made when needed as opposed to one time per annum.
- There are way fewer regulations and limitations.
Cons
- The entire process is under lots of scrutiny so as not to be abused. For example, if the service fees are seen to be too high by the Chinese regulators, they will issue CIT.
- All the royalties and service fees are subject to VAT.
Using Intercompany Loans
Another effective channel for WFOE accounting to explore is intercompany loans. These are divided into two different types that are outbound loans and inbound loads. Inbound loans are when a parent company loans money via payment to its Chinese subsidiary. Outbound loans are the opposite way around where the Chinese subsidiary loans money via payments to the parent company. You can only access this channel if the two companies have some kind of equity relationship already in place.
- Some kind of service fee for marketing, tech, or management services.
- Paid as royalties for using IP, copyrights, and trademarks.
- Some type of reimbursement on taxes incurred on IT facilities or even employment salaries
Pros
- Any extension of the loans is tax-free, which is only levied on any interest.
- Any extension of the loans can be done with the company’s needs in mind.
Cons
- You get the most scrutiny from SAFE.
- You are limited to only 30% of the registered capital where inbound and outbound loans are concerned.
- There are multiple business-related taxes on inbound and outbound loans.
- You can only use outbound loans during the first year of your business operations in China.
