Outbound remittance from China often proves challenging for overseas shareholders. While several options are available, related procedures need to be adequately anticipated. The most common way to repatriate profits from China is the distribution of dividends by the China Foreign Invested Enterprise (FIE). Prerequisites include injection of registered capital of the FIE and achievement of annual audit and tax compliance. Besides, former losses (if any) shall offset accumulated distributable profits, part of which shall be contributed to a mandatory surplus reserve. Taxes and control of changes include: Timeline & frequency: minimum 6 to 8 weeks, once a year.1. Dividends
2. Management Fees
Intercompany services are another way to repatriate profits from China. Overseas headquarter offices (HQ) typically charge their FIE for supporting services including HR, IT, financing, or use of intangible assets (such as trademark, patent, or know-how). Despite many advantages, this option comes with higher risks of tax investigations, especially if the services fees are not at arm’s length, which can challenge their tax deductibility at FIE level. Adverse tax treatment might also occur if a Permanent Establishment of the overseas HQ is characterized in China.
Taxes and control of changes include:
- Withholding tax at the standard rate of 10% (reduced under DTAs) or up to 25% if attributable to a permanent establishment in China;
- VAT at the standard rate of 6%;
- Approval of the SAFE.
Timeline & frequency: around 6 weeks, several times a year if reasonable.
3. Loan’s Interest
Intercompany loans are a third option to repatriate profits from China. The parties shall have an equity relationship and both must be established for at least one year. There is a limited loan ratio and the full amount shall be repaid within five years. To be effective, the contract shall be registered with the SAFE and the funds shall be deposited on a dedicated foreign loan bank account.
Taxes and control of changes include:
- Withholding tax at the standard rate of 10% (reduced under DTA);
- VAT at the standard rate of 6%;
- Approval of the SAFE.
Timeline & frequency: around 5 weeks, once a year.
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Let's break down the concepts in that article:
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Dividends:
- Procedure involves distributing dividends through China Foreign Invested Enterprise (FIE).
- Prerequisites: Registered capital injection, annual audit, tax compliance.
- Losses offset against distributable profits; part to mandatory surplus reserve.
- Taxes: 10% withholding tax (possibly reduced under DTAs), State Administration Foreign Exchange (SAFE) approval.
- Timeline & frequency: 6 to 8 weeks, once a year.
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Management Fees:
- Involves intercompany services charged by overseas HQ to FIE (HR, IT, financing, intangible assets).
- Risks: Tax investigations if fees not at arm's length, adverse tax treatment for Permanent Establishment in China.
- Taxes: 10% withholding tax (potentially reduced under DTAs), up to 25% for a Permanent Establishment, 6% VAT, SAFE approval.
- Timeline & frequency: Around 6 weeks, several times a year if reasonable.
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Loan’s Interest:
- Intercompany loans as a method to repatriate profits.
- Parties need an equity relationship, established for at least a year.
- Limited loan ratio, full repayment within five years, contract registration with SAFE, funds in a dedicated foreign loan bank account.
- Taxes: 10% withholding tax (reduced under DTA), 6% VAT, SAFE approval.
- Timeline & frequency: Around 5 weeks, once a year.
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