Taxes on Dividends China

China’s Corporate Income Tax Law regulates taxation for both local and foreign-owned companies. Foreign companies are taxed based on their Chinese-source income, and there is a withholding tax for dividends, royalties, and interests.

To repatriate dividends from China, companies must follow the Chinese regulations for foreign exchange control.

What is Dividend Withholding Tax in China?

The applicable withholding tax on dividends in China depends on whether the dividends are paid to a company or an individual, and whether the company or individual is a tax resident:

• Dividend Withholding Tax for Individuals in China

For individuals, dividend income is subject to a 20% tax rate, except when specified otherwise in the relevant tax agreement. Depending on the holding period, dividend incomes generated from shares traded on the Shanghai, Shenzhen, or Beijing Stock Exchanges may be eligible for a 50% or 100% tax reduction.

Furthermore, according to the 1994 “Notice of the Ministry of Finance and the State Administration of Taxation on Several Policy Issues Concerning Individual Income Tax” (Caishuizi {1994} No. 20), Dividends and bonus income obtained by foreign individuals from foreign-invested enterprises is exempt from individual income tax.

Even though this regulation was implemented almost 30 years ago, to this date it appears to still be valid.

In a 2013 notice by the government (Guofa {2013} No. 6) the authorities announced their intention to cancel this incentive, but to our knowledge this hasn’t been implemented yet, so to this date foreign individuals in China can enjoy IIT exemption on income dividends. However, whether an individual will actually be able to enjoy this benefit remains up to the discretion of the local tax bureau.

• Dividend Withholding Tax for Companies in China

If a tax resident enterprise (TRE), i.e., companies that have been established in China, directly invests in another TRE, the dividend income is exempt from Corporate Income Tax (CIT), except when the dividend comes from publicly traded stocks held for less than 12 months.

Non-tax resident enterprises (non-TREs), i.e., companies that do not have offices or business locations in China, must pay a withholding tax of 10% on their gross income generated from dividends, interest, property leases, royalties, and other types of passive income sourced in China. The tax rate may be reduced if there is a Double Taxation Agreement (DTA) in place between China and the country in which the company is a tax resident.

**Note that the imposition of withholding tax on dividends for non-resident companies started in 2008. Therefore, dividends paid from earnings before 2008 are still not subject to withholding tax.

• Double Tax Avoidance Agreements China

China has entered into double taxation agreements with a vast range of countries. In a number of these agreements, the countries have agreed to a reduced tax rate for dividends paid from one contracting state to the other.

If a lower rate is agreed, it is usually specified that a lower tax rate applies if the beneficial owner is a company which holds directly or indirectly at least 25% of the capital of the company paying the dividends.

For example, according to the DTA with countries such as Belgium, France, the Netherlands, United Kingdom, the withholding tax rate for dividends is reduced to 5% if the aforementioned requirement is satisfied.

This provision is helpful for larger companies with affiliates in China. It is important to note that if the company has a complex international holding structure, the tax bureau will review the company’s beneficial owner information to establish whether the reduced rate applies.

For example, if the shareholder in the Chinese entity is a Hong Kong company, but the ultimate beneficial owner (UBO) is a company resident in the United States, the withholding tax rate will not be 5% (according to the DTA with Hong Kong), but 10%, as the UBO is located in the United States and the DTA between China and the United States does not include a reduced withholding tax rate.

How Foreign Companies Based in China Can Repatriate Dividends

When a foreign invested company generates a profit, it can choose to re-invest these funds in the business or to issue a share of this profit as a dividend to its shareholders, proportional to the shares owned by each shareholder. Below we explain the requirements and procedures to be satisfied and completed for a foreign invested company to pay out dividends.

Requirements for WFOEs in China to Pay Dividends.

For foreign subsidiaries operating in China, there are specific conditions that must be met to repatriate its profits to its parent company. These conditions include:

1. Settling any outstanding income tax liabilities
2. Addressing any losses carried forward from previous years of doing business in China
3. Maintaining a reserve fund of at least 10% of after-tax profits up to an accrued reserve fund of at least 50% of registered capital.
4. Completing the Annual Audit by a qualified Chinese CPA firm and completing the Annual CIT Tax Filing

 

Once these conditions are met, the remaining profits are distributable, from which a withholding tax is deductible before the dividend can be sent to investors.

The rate of withholding tax and other terms depend on the tax treaty between the foreign subsidiary’s country of origin and China. To reduce the withholding tax rate, the foreign subsidiary can apply with its local tax authority. However, there is no guarantee that the request will be granted. MSA has successfully supported numerous clients with obtaining the reduced rate as per the DTA between China and the relevant countries.

Dividend Distribution Process for WFOEs

When foreign invested companies want to distribute dividends, the following steps must be completed in order to remit the funds out of China:

Preparation of documents, which generally include:

• Audit report
• Annual CIT filing
• Foreign exchange registration certificate
• Articles of association
• Profit distribution resolution
• Tax registration certificate

Other documents may be requested depending on the specific case

• Board of Directors/Executive Director to sign the official dividend distribution resolution
• Application for lower withholding tax rate per DTA
• Filing for withholding tax and subsequent payment (taxes to be paid within 7 days to 1 month depending on the location)
• Payment filing with Tax Bureau (to obtain certificate to authorize payment with bank)
• Apply with the bank for payment of the dividends

For the final payment of the dividends, the bank is responsible, on behalf of SAFE, to check all relevant documents for the dividend distribution. Therefore, it depends on your local bank branch what documents they require.

Generally, the bank will request all documents provided by the tax bureau, as well as other documents such as the company’s articles of association, financial information on the shareholder, a general statement about the business of the company and more. Furthermore, banks may require a special audit report and capital verification report specifically for the dividend, especially in case of the first dividend distribution for a company.

After the dividends have been successfully paid out to the shareholder, the tax bureau may ask for further information on the shareholder to verify that the lower withholding tax rate as per the DTA is actually applicable. This may include:

• The DTA application form
• The shareholder’s tax residence certificate issued by its local tax authority
• The dividend board resolution, general information on the shareholder (such as investor’s and UBO charter, annual audit report minutes of the latest board meeting and HR information)
• Proof of substantial business activities and proof whether there is an obligation to pay more than 50% of the proceeds within 12 months of receipt to a third country/region.

How Can Foreign Companies Reinvest Dividends in China?

Foreign companies can reinvest their dividends by establishing or acquiring a new subsidiary, increasing the registered capital of an existing subsidiary, replacing investments in local resident companies, or purchasing equities in local companies. Compliance with applicable laws on foreign investment in China is required.

As these profits will be re-used within China, a foreign company would be eligible for dividend tax deferral if all of the below prerequisites are met:

1. Direct re-investment can only be made in Non-Prohibited Projects. In practice, all activities which are not listed on the “Negative List” are eligible.
2. Direct re-investments are limited to equity investments, including capital increase in an existing enterprise, capital contribution to a new enterprise and the acquisition of a non-related enterprise’s shares. Excluding the aforementioned forms of equity investment in a listed company.
3. The dividends used for re-investment shall be generated from the invested PRC tax resident enterprise’s retained earnings.
4. Cash investments shall be made directly by the enterprise that distributes the profit; these shall NOT be paid to any other foreign or domestic accounts prior to re-investment. Securities shall NOT be transferred to other enterprises on entrustment or a on temporary basis prior to re-investment.

 

Please note that the dividend withholding tax will be deferred in such a case, not exempted. Therefore, if the company would sell or liquidate their subsidiary in the future, the deferred tax must still be filed and settled.

Find Out More About Taxation in China

It is worth noting that China has a tax treaty network with many countries, and the dividend tax rates may be reduced or exempted for non-resident individuals and companies from treaty countries. It is advisable to consult a professional tax advisor like MSA for specific advice on tax matters in China. We have successfully supported numerous clients in obtaining a reduced withholding tax rate based on DTAs or other regulations.

MSA has been offering assistance to overseas enterprises in various sectors in China for more than a decade. Our wide range of services includes auditing and assurance, tax consultation, corporate solutions, and more. Learn how we can help with managing your taxes on dividends in China. Contact us now!