How Does a China Subsidiary Transfer Funds Out of China
Foreign companies wishing to establish a subsidiary in China to invest, enter the Chinese market, or trade through a Chinese-based company often choose to set up a wholly foreign-owned business (WFOE). Establishing this type of company is the best option, especially if you plan to stay in China for a long time and want sole control of your company. A foreign subsidiary can remit profits made in China back to the investor's country.
However, many companies and investors do not have enough information about how to transfer the money they will earn in China outside of China. Basically, there are multiple methods of how a foreign company can transfer earnings from its Chinese subsidiary.
Money Transfer of Foreign Company Subsidiaries Out of China
Subsidiaries in China can transfer funds to the parent company outside China, but this is limited to certain conditions. China implements a strict exchange control system, so funds entering and leaving China are highly scrutinized. For this, the Chinese government follows a tight financial policy to control the cross-border flow of funds. Subsidiaries are only allowed to transfer profits to their foreign company once a year. In order to make this transfer, a financial audit and tax compliance must be completed by the company. The amount of profit that can be sent is determined and limited according to the net profit stated in the financial statements.
Since China is still classified as a developing country, it retains highly regulated foreign exchange control. For companies with subsidiaries in China, the methods used to transfer money to the parent company abroad should be done correctly since there is little margin for error. The main method used by companies in China is to distribute dividends, but there are different methods.
Three Ways of Repatriation Funds from China
1) Dividends payments
2) Intercompany payments
3) Intercompany loans
1) Dividends payments
Sending profits as dividends is the most preferred method by international companies looking to apply profit returns from China. Profits earned by subsidiaries in China can be sent back to the home company abroad by means of a dividend distribution, provided that it complies with the restrictions and rules in this regard.
Through this channel, the surplus is converted into shares distributed to the shareholders of the company (based on the company's relative ownership). The amount of profit to be distributed as a dividend is determined by the Company's Board of Directors/Executive Director.
Dividend distribution is the most common method but is subject to certain prerequisites:
· Annual Corporation Tax (CIT) and withholding tax must have been paid. (It is 25% if there is no DTA agreement between FIE country and China to avoid double tax)
· The annual audit should be done by a Chinese accounting company.
· The company must meet pending income tax obligations.
· The company profit should cover accrued losses from the past.
· 10% of the after-tax income has to be set aside in a profit reserve fund. The company should deposit minus 50% of its registered capital in the reserve fund.
· Dividend payments are subject to 10% CIT withholding when sent abroad, with some exceptions.
A company with foreign capital can transfer the profit abroad only after the authorized capital has been injected within the periods specified in the company's Articles of Association and provided that all the conditions listed above are complied with. The main disadvantages are that (1) dividend payments can be made once a year, (2) cannot be realized before May, (3) withholding tax is deducted from dividends, and (4) the process takes 2 to 4 weeks.
2) Intercompany payments
Instead of paying dividends, a WFOE with a license to operate in China can transfer funds through different internal payment methods:
a) A service fee: Parent Company provides to the WFOE; may receive payment as a service fee due to support such as marketing, accounting, and IT. WFOE pays 5-10% CIT, 6% VAT, and additional taxes on service charges on behalf of the principal company. Service fee payments are deductible from China Income Tax (CIT) taxable income.
b) Royalties (IP and trademarks): Companies abroad can receive payment from China subsidiaries under titles such as copyright, trademark usage, patent, copyright, and intellectual property (IP) usage fees. Certain royalty contracts must be drawn up and registered with a trademark office located in China. Such payments and royalties are subject to strict regulations. Royalties are subject to withholding on all payments (usually 5-10% corporate income, 6% VAT, and other additional taxes).
c) Reimbursement: Taxes incurred on IT facilities and employee salaries.
3) Intercompany Loans
Intercompany loans can be divided into:
a) Inbound loans: Earning interest income by the parent company lending to its subsidiary in China against interest. The Parent company lends to the subsidiary in China. The subsidiary company in China repays a portion of its profits as an interest payment as per the agreement subject to the loan.
b) Outbound loans: A money transfer by the Chinese subsidiary to the parent company. This channel is only valid if there is an equity relationship between the two companies. The China company returns funds to the parent company through an offshore intercompany loan in this method. However, this method is a temporary solution for profit transfer. These funds will have to be paid back to the company in China later on.
Expand into China without setting up a company, by employing or relocating key staff to take a first step in exploring the market. A professional employer organization (PEO) service can act as the official employer of record (EOR) for your staff in China while you expand your business. With the support of our trusted partner network, we can facilitate local hiring and employment without the time and cost of setting up a legal entity in country.
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