I. 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 FIE's 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. |
II. 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" ).
III. 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.
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