Once your business is established in China and you are making a profit, you will probably want to repatriate the proceeds at some point. Tax implications and tax planning are important considerations for determining the optimal profit repatriation strategy.
Prerequisites
In order for a company to distribute and repatriate profits back to their investors it must:
- Complete the external Annual Audit conducted by an accounting firm
- Settle its income tax liabilities
- Make up any losses that were carried forward from previous years
- Set aside a minimum 10% of after-tax profits in a reserve fund until the accumulated reserve fund reaches 50% of the registered capital, which ensures that a portion of the profits are re-invested into the company
- The remaining amount is distributable profits.
- The withholding tax will be deducted before the dividend can be remitted back to the investors.
A Chinese bank will only process dividend payments with a completed audit report and tax receipt confirming the amount of profit distribution and tax payment.
Profit Repatriation Strategies
The most common profit repatriation strategy is a dividend payment. It is relatively easy to repatriate profit by way of dividends, but the tax burden could be high from the China side (corporate income tax and withholding tax) and the U.S. side as well.
A Chinese bank will only process dividend payments with a completed audit report and tax receipt confirming the amount of profit distribution and tax payment.
The following documents are required:
- Resolution of Board of Directors on the distribution of profits
- Latest audit report on the paid-in capital
- Audit report
- Certificate of filing at the tax bureau in case the amount is above $50,000
- Tax payable receipt
- Business license
Other documents may be required by the banks subject to their own internal compliance/KYC/risk management requirement.
With a service/royalty fee, the overall tax burden can be lower than with dividends because the tax is a value added and withholding tax.
This method only allows genuine arm’s length transactions directly related to the company’s business. Otherwise, it may be challenged by the tax bureau. There are restrictions on the amount which can be repatriated through a service/royalty fee.
This method requires the following documents:
- Contract
- Commercial invoice
- Certificate of filing at the tax bureau if the amount is above $50,000
Other documents may be required by the banks subject to their own internal compliance/KYC/risk management requirement.
An intercompany loan between the overseas affiliate or parent company and the subsidiary in China must be repaid. Thus, it’s not a solution for permanent repatriation.
There are two types of intercompany loans:
- The Chinese subsidiary lending to its overseas affiliate or parent company. This can be a way of repatriating funds, though it is not a permanent solution.
- The Chinese subsidiary borrowing from its overseas affiliate or parent company. This is not a solution for repatriation.
These types of loans must be handled via a bank by way of entrusted lending. A subsidiary in China cannot remit money overseas directly. The transaction must be handled through a bank which will verify and approve the loan. This type of lending by the Chinese entity to its overseas affiliate is called entrusted lending. It is possible that the bank may reject the company’s application. It is also possible that the bank may reject the application at times when the government wants to restrict the capital outflow.
The following restrictions apply:
- The company (lender) must have been established for one year or longer and have an equity relationship with the borrower (overseas affiliate company/parent).
- The total amount of RMB loans and foreign currency loans the lender can lend to the borrower must not surpass 30% of its total owner’s equity value (which is subject to dynamic adjustment made by the regulatory), based on the audited financial reports of the previous year.
- The interest rate shall conform to market principles and be determined through negotiations between the borrower and lender within a commercially reasonable range, but it must be higher than zero, otherwise, it might be challenged by the tax bureau.
- The tenor of the loan shall generally be between six months and five years subject to the purpose of the loan. If the tenor is five years or longer, it shall be reported to the local People’s Bank of China (PBOC) for archival filing.
- The loan can be renewed but shall not be renewed more than once.
- The banks will carefully check whether the borrower’s business scale is suitable for the scale of the loans, the actual lending purpose to guarantee authenticity, that the purpose is reasonable, and that the borrower has the ability to repay the loan, etc.
Overseas borrowing. When the company in China borrows from its overseas affiliate company and/or parent, it must open a specific capital account for the cross-border loan whether it is an intercompany loan or overseas borrowing. All the funds related to this loan (including interest) must be settled through this account.
The ratio and parameter are set up by the regulatory and are subject to dynamic adjustment. Currently, the ratio for the company is 2. The parameter is 1.
Thus, the maximum amount the company can borrow from overseas is twice the company’s capital or net assets. In addition:
- The company must have a foreign debt quota which is the maximum amount that the company can borrow from over-seas, according to the formula below:
Capital/Net Assets
x Cross-Border Financing Leverage Ratio
x Macro Prudential Adjustment Parameter
= Maximum Borrowing Amount
- The currency that the company uses to sign the loan agreement, the money the company withdraws, and the money the company uses to repay the loan must be the same currency.
- If the company borrows in foreign currency, the company can convert it into RMB for usage.
Note: In the past, the foreign debt quota was the company’s total investment minus registered capital; the company can choose to use either this one or the new formula mentioned previously, and do filing at PBOC/SAFE. In principle, it is not allowed to change after filing. PBOC/SAFE will decide the final management model for company’s cross-border financing later.
Ready To Help:
Established in 2008, PNC's Shanghai Representative Office (SRO) is available as a resource to PNC clients who are doing business with China or in China. The SRO can provide assistance and guidance on:
- Corporate Establishment
- Obtaining Local Banking Services
- Market Information
- Introductions to Local Resources
Should you have any questions, please contact the International Advisory Team; Grace Zhu, Chief Representative in the PNC Shanghai Representative Office.
