Foreign-invested enterprises (FIEs) in China must distribute profits to their overseas shareholders following China’s corporate laws. Furthermore, the profits are typically given out through a dividend distribution which is processed within a year. Dividend distribution also takes place when transferring shares from selling a company in China. It involves tax implications that may be a big concern for foreign investors.
Read our previous article about Tax Implications of Selling Your Company in China
Receiving profit is always the top priority of business shareholders whether in China or other countries. For them, profit repatriation is an assurance of their fruit of investments. Thus, it is crucial to understand certain policies and procedures surrounding the distribution of dividends.
When is the dividend allowed to distribute?
It is quite challenging to distribute profits to shareholders considering the strict flow of foreign exchange in and out of China. Moreover, there are other existing laws and regulations associated with tax settlements as well as transfer pricing rules in the country.
Nevertheless, FIEs may send dividend payments to their shareholders if the following conditions are satisfied:
- Passed the annual audit;
- Settled tax obligations (i.e. CIT, VAT, business tax) and paid other outstanding taxes;
- Made up the losses from the previous years;
- Paid-up the registered capital or a capital injection scheduled as set out in the Articles of Association;
- Obtained the approval of the shareholders via a resolution;
- Contributed 10 percent of the after-tax profit to a statutory reserve fund.
The FIE can discontinue putting money into its statutory reserve funds when its total contribution reaches more than 50 percent of its registered capital. Moreover, it can also allocate a general reserve fund from its after-tax profits. Normally, banks have a dividend distribution policy where they have to maintain a general reserve no less than 1 percent of their risk-bearing assets from their after-tax profits.
Can shareholders enjoy relevant tax incentives?
An FIE must withhold taxes on behalf of its shareholders and check whether they could enjoy preferential tax treatments.
For instance, there is a double taxation relief accorded to foreign investors who are from countries having a tax treaty with China. The foreign shareholder, therefore, may qualify as a beneficial owner and a preferential corporate income tax (CIT) rate may apply.
Find out more about the double tax agreement here: Double Taxation Relief for Foreigners in China
Foreign shareholders can also qualify for tax deferral treatments if they decide to reinvest their dividends. That is, they invest in projects or sectors which are not in China’s Negative List of industries.
What are the procedures in dividend distribution?
- Complete the annual audit report by the end of April before the tax reconciliation deadline.
- Pay the required taxes (i.e. CIT reconciliation) and confirm the net profits.
- Prepare the board of directors’ resolution with shareholders’ approval.
- Check for DTA and prepare for the preferential tax filing.
- Withhold taxes on behalf of the shareholders and obtain a tax payment certificate.
- Apply at the State Administration of Foreign Exchange (SAFE) and obtain the Tax Filing Form for Outward Payment of Services Trade and Other Items.
- Apply to a foreign exchange bank and submit the form.
- Remit the dividends.
To ensure a smooth transaction, make sure that the overseas bank can receive RMB currency. Furthermore, it is necessary to present all relevant documents and confirm with the tax bureau to avoid delays. Most of the materials need the signatures of shareholders and the process can be long and cumbersome. So, it is important to review and validate the documents with tax authorities several times.
Profit distribution by extending loans
FIEs can also remit undistributed profits by extending a loan to an overseas shareholding company. However, this requires stricter scrutiny and further requirement. For example, an FIE must have an equity relationship with a foreign company and both must be established for one year. On the other hand, the recipient should have a good compliance record involving foreign exchange. There is also a limited loan ratio equivalent to 30 percent of the owner’s equity. Besides, the loan recipient is given within five years to repay; otherwise, the FIE lender must report to SAFE or the local branch of the People’s Bank of China.
By extending loans, the FIE can utilize the CIT paid in China to offset any tax liability to be incurred through the receiving end. But it will have to pay for a 10 percent withholding tax (WHT), 6.72 percent value-added tax (VAT), and surcharges on the interest income.
Key takeaways
The remitting banks will usually wait for the SAFE’s approval before it can begin the repatriation of dividends. However, if the amount of the transaction is below USD 50,000, the bank will only need the annual audit and tax reconciliation reports. Furthermore, overseas transfers of more than USD 200,000 will need the overseas payment form sealed by the tax bureau along with the said reports and authorization from SAFE before it can make the transfer of funds.
The bank transaction usually takes 15 days to one month depending on the amount of transaction. Meanwhile, the policies regarding the procedures for filing preferential tax may differ from one city to another. Hence, it is always best to get updates and consult with a local advisor.
Contact us
If you want further details on a specific case or our help in the process of distributing dividends to your shareholders, you may contact us by email or call our offices in different China locations. Our local experts will attend to your needs. Also, visit our tax and accountancy page to see more details of our specialist services.
Moreover, your company can take advantage of our easy-to-use, 24-hour access management tool like Kwikdroid. Kwikdroid is a Cloud-based accounting and company solution that will be made available in your workplace in no time.
S.J. Grand also offers Cloud ERP services for your business if you are currently experiencing difficulty in managing your operations amid the COVID-19 pandemic. Check out our IT services page for more details.
