Repatriating Funds from China: A Comprehensive Guide
One of the most common challenges foreign-invested enterprises (FIEs) encounter is repatriating funds from China. Given China’s strict foreign exchange control policies, transferring profits can be a complex and taxing process. Therefore, it is crucial for these firms to prepare a robust repatriation strategy to minimize tax burdens and ensure compliance.
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How to Transfer Money from a Chinese Subsidiary to Your Enterprise Abroad
Companies operating in China intending to transfer their profits abroad may face several challenges due to the complexity of the process, which varies by country and the mechanism used. Understanding the legal challenges associated with cash repatriation early on and building a solid strategy is essential to ensure timely and complication-free profit transfers.
China’s policies on foreign exchange are highly regulated, making repatriating funds more complex than other countries. The most common methods of repatriating funds out of China include:
- Issuing Dividends to the Parent Company
- Service Fees, Royalties, and Reimbursements
- Outbound Intercompany Loans
When choosing a repatriation strategy, it is essential to understand:
- The amount of taxes required to be paid
- The specific requirements of the repatriation strategy
- The mandatory procedures to be followed
Issuing Dividends to the Parent Company
When a foreign investment company generates a profit, it can reinvest these funds in the business or issue a share of this profit as a dividend to its shareholders, proportional to the shares owned. Only the profits repatriated outside of China are subject to withholding tax.
Service Fees, Royalties, and Reimbursements
Companies can repatriate funds via intercompany payments as service fees to the parent company, which can be deductible from the China Income Tax (CIT) taxable income. A contract and corresponding invoice must support these payments. Royalties for using intellectual property such as trademarks, patents, technology, and copyright must be registered and are under strict regulations.
Outbound Intercompany Loans
Intercompany loans between the parent company and the Chinese subsidiary can also be used to repatriate funds. There are two types:
- The Parent Company lends funds to the FIE in China, and through interest payments, funds are repatriated.
- The FIE repatriates funds to the Parent Company through an offshore intercompany loan.
Procedures and Documents Needed to Distribute Profits
Dividend Distribution
The procedure may take two to four weeks and requires documents such as the business license, audit report of paid-in capital, external auditor’s report, certificate of tax filing, tax payable receipt, and relevant board resolution on profit distribution. After filing and receiving approval from the State Administration of Foreign Exchange (SAFE), dividends can be distributed via overseas transactions.
Service Fees and Royalties
Service agreements must accurately describe the nature of the service and be supported by a contract and corresponding invoice. The arrangement must be genuine and registered at the trademark bureau for royalty payments. Non-compliance may result in additional taxation or withholding tax.
Intercompany Loans
These loans must benefit the company in China and be priced according to the arm’s length principle. Increased scrutiny from Chinese tax authorities means that compliance is crucial.
How is China’s Foreign Exchange Control Framework Different?
China maintains a “closed capital account,” meaning companies and individuals must strictly comply with foreign exchange rules, preventing the free movement of money into or out of the country. These regulations are overseen by SAFE and the People’s Bank of China (PBOC). Cross-border payments require SAFE’s approval and record-filing. Non-compliance can result in severe penalties, including the inability to distribute profits to foreign shareholders.
How We Can Help Your Business in China
Since 2011, MSA has supported foreign enterprises across all provinces of China and Hong Kong with accounting, tax, compliance, payroll, and corporate services.
Our mission is to provide financial services to foreign enterprises, focusing on transparency, compliance, and sustainability. We ensure our clients understand administrative and reporting requirements in China and maintain full control over their finances.
For more information on this subject, please do not hesitate to contact us.
