1. Before-Tax Distribution
Overseas parent company can repatriate before-tax profits by means of inter-company charges such as royalty fees, loan interests, rentals, overhead charges, management fees, training fees, technical support fees and other service charges etc. But the overseas parent company may be exposed to Foreign Enterprise Income Tax (“FEIT”) of 10% and/or Business Tax (“BT”) of 5% on the gross income earned in China. The Foreign Investment Enterprise (FIE) will be deemed by law as the withholding agent of its overseas parent company to pay the taxes in China accordingly. Please also note that the Chinese tax bureaus may not allow the FIE to claim tax deduction of the inter-company charges unless the expenses are directly related to the FIEs business operations and are charged at market rates.
|Inter-company Expenses||Expenses can be deduct from the profits of the FIE?||Any China tax exposure to overseas parent company?|
|Royalty Fees||It will be tax deductible only if the payment is supported by sufficient documentations such as contract, invoices and payment evidence.||The overseas parent company will be subject to FEIT on withholding basis.|
|Overhead Charges||It will be tax deductible if the transaction is properly documented.||The overseas parent company will be subject to both FEIT and BT on withholding basis if the relevant services are performed in China.|
|Management Fees||It will be tax deductible only if it is paid by a branch to its overseas head office and is approved by the tax bureaus.||The overseas parent company will be subject to both FEIT and BT on withholding basis if the relevant services are performed in China.|
|Interests / Rentals||It will be tax deductible if the transaction is properly documented. Any excess of interest charged over the commercial rate is not deductible.||The overseas parent company will be subject to FEIT in China on withholding basis. The rental income from any immovable property will also be subject to BT.|
|Service Fees||It will be tax deductible if such expense is related to the business of the FIE and supported by written evidence.||The overseas parent company will be subject to both FEIT and BT on withholding basis if the services are performed in China. Its staff providing the services in China may also be liable to Individual Income Tax.|
2. After-Tax Accounting Provisions
Before declaring dividends to overseas parent company, the FIE has to make accounting provisions to the so-called “three reserve funds” at a certain percentage of the after-tax profits in accordance with the Chinese Company Law:
1. The Reserve Fund (at least 10%): It will be used to cover any losses suffered by the FIE. However, when the accumulated amount of the Reserve Fund exceeds 50% of the company’s total registered capital, no further allocation is required.
2. The Staff and Workers Welfare and Bonus Fund (5% to 10%): It will be used as an irregular reward to employees and other collective staff welfares (e.g. allowances to employees for purchasing, constructing and repairing their houses etc.)
3. The Enterprise Expansion Fund: It will be used to expand operation and increase investment with approval from the local bureau of Foreign Trade and Economic Co-operation. The Chinese Company Law does not specify the minimum amount to be contributed to the Enterprise Expansion Fund. The FIE therefore can decide the appropriate amount itself by stating in its Articles of Associations (“AOA”).
3. Repatriation of Dividends
When the accounting provisions for the above-said three reserve funds are made, the FIE can declare dividends out of the remaining distributable profits and remit them to the overseas parent company. At present, the after-tax dividends paid by the FIE to its overseas shareholder are exempted from tax in China.
The FIE can go to a licensed bank to remit the after-tax profits out of China without the necessity of getting prior approval from the local bureau of the State Administration of Foreign Exchange (“SAFE”). Nevertheless, the bank will require the FIE to produce the following documents for verification before agreeing to transfer the dividends to an overseas bank account of the parent company:
(1) tax payment statement and tax return;
(2) auditors’ report issued by a Chinese CPA firm confirming the availability of profits and dividends for distribution in the current year;
(3) the Board minutes authorizing the distribution of dividends to its shareholders;
(4) the foreign exchange registration certificate issued by SAFE;
(5) the capital verification report issued by a Chinese CPA firm;
(6) if the declared dividends will be distributed out of the accumulated profits earned in the past years, the FIE has to appoint a Chinese CPA firm to issue an auditors’ report to the bank to certify its financial positions of the years from which the profits arose; and
(7) other information as required by SAFE.
4. Documents and Procedures for Remittance of Profits, Dividends and Bonuses
(1) Documents to be submitted to bank
(a) Tax payment statement and tax return (enterprises eligible for tax exemption and reduction should also submit proofs issued by local tax office);
(b) Audited report prepared by accounting firm on profits, dividends and bonuses of the current year;
(c) Resolution of the board of directors on dividend and bonus distribution;
(d) Foreign exchange registration certificate of foreign-invested enterprise;
(e) Credit report prepared by accounting firm;
(f) Other information as requested by SAFE;
(g) For remittance of profits, dividends and bonuses from previous years, an audited report on the FIEs financial situation during the year in question should also be submitted to the bank.
(2) Bank verifies authenticity of documents
(3) Bank completes remittance procedures
Bank will mark “profits, dividends and bonuses remitted on the foreign exchange registration certificate and tax payment statement respectively and endorse with an official seal. When remittance is done, bank will keep photocopies of these two documents for record.
(4) Bank reports to local foreign exchange administration
Within the first five working days of each month, bank will submit to local foreign exchange administration department reports (in the form of spreadsheet) on profits, dividends and bonuses remitted by FIEs during the previous month.
In accordance with the Notice on Issues Concerning the Remittance of Profits, Dividends and Bonuses by Designated Banks, SAFE is authorized to carry out random check of remittances amounting to an equivalent value of USD100,000 or more, or remittances deemed suspicious, to determine their authenticity.