Profit Repatriation: the latest trends on how to bring profits from your China business back home
Although China keeps striving to open its market for foreign investors, it has long maintained strict foreign exchange controls. Once your business in China is making profit, you likely want to repatriate the proceedings at some point to overseas. In this update we share with you briefly three ways to bring your profits back home, which are by (a) issuing dividends, (b) service fee payments and (c) royalty fee payments.
MS Advisory has prepared a white paper on profit repatriation which in detail explains all profit repatriation methods, as well as the steps, issues and requirements to take in mind with making overseas payments from the Chinese subsidiary. For more information on this matter, please click on the following link and make your request to receive their Profit Repatriation white paper.
1. Dividend Payments
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:
A) The registered capital as stated in the Articles of Association should be fully paid up. A capital verification report needs to be provided to confirm to the authorities that all registered capital has been paid up.
B) Dividends may only be issued when the accumulated losses of previous years have been made up. The remaining positive balance can be repatriated.
C) 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.
D) 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 investor. 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.
2. Service Fee Payments
When making overseas payments via management or consulting fees, it is most important that the actual transaction has “substance”. When making these payments, the tax authorities may use the benefit test (or other tests at their disposal) to review whether the service provided actually has benefited the Chinese company. If deemed as having “no substance”, this expense may not be able to be used for Corporate Income Tax (CIT) calculation and as a result could increase the overall tax burden of the Chinese company.
To make an overseas service fee payment, the company requires to deliver to the Chinese tax authorities a relevant contract and invoice. This contract may be required to be registered first at the Chinese tax authority.
On this transaction, VAT and surtax needs to be paid, and the authorities may request as well withholding tax to be paid, which would be based on Deemed Profit rate (30% - 50%) against the CIT rate of 25%.
3. Royalty Fee Payments
Royalties are payments charged for the use of intellectual property, copyrighted works, franchises, brand or specific market/production knowledge.
Same as for service fees, these payments require substance, and there needs to be a contract and invoice in place for payment of taxes in China. Pending on the type of royalties, additional registrations may be required.
Furthermore, on these transactions VAT, surtax and withholding tax needs to be paid. Withholding tax on royalties within China is 10%, this may be lowered following the provisions of the DTA between China and the country of the overseas investor.
Before deciding which strategy to use for repatriating funds out of China, it is important to consider each option and calculate the respective tax burdens, which would make most sense for your business, as well has actual substance.
For more information on profit repatriation, please visit MS Advisory and request their profit repatriation white paper.
MS Advisory, part of Moore Stephens Belgium and member of the Moore Stephens International network, is a professional services firm based in China. With the support of their local team in Shanghai and their international network, it is their mission to provide a full range of financial and corporate services to foreign enterprises in China and Hong Kong.
To learn more about their services, please visit us at www.msadvisory.com