For businesses established in China, there are important considerations in determining the best profit repatriation strategy. Once your business is established in China and starts making a profit, you may want to repatriate the earnings back home at some point. Tax implications and tax planning are important considerations in determining the best profit repatriation strategy.
In order for the company to distribute and repatriate profits back to investors, it must:
Complete an external annual audit conducted by an accounting firm.
Settle their income tax liabilities.
Cover any losses carried forward from previous years.
At least 10% of the after-tax profits are deposited in the reserve until the accumulated reserves reach 50% of the registered capital to ensure that a part of the profits is reinvested in the company.
The remaining amount is distributable profit.
Withholding tax will be deducted before the dividend is repatriated back to the investor.
Chinese banks will only process dividend payments if they provide a complete audit report and a tax bill confirming the distribution of profits and the amount of tax paid.
The most common profit repatriation strategy is dividend payments. It is relatively easy to repatriate profits through dividends, but the tax burden on both the Chinese side (corporate income tax and withholding tax) and the US side can be high.
Chinese banks will only process dividend payments if they provide a complete audit report and a tax bill confirming the distribution of profits and the amount of tax paid.
The following documents are required:
Resolution of the Board of Directors on Profit Distribution.
Latest paid-up capital audit report.
Audit report. Proof of filing with the tax office when the amount exceeds $50,000.
Taxable receipts. Business license.
Banks may request additional documentation in accordance with their internal compliance KYC risk management requirements.
Collecting service royalties, the overall tax burden may be lower than dividends, as the tax falls under VAT and withholding tax.
This method only allows genuine arm's length transactions that are directly related to the company's business. Otherwise, it may be questioned by the tax office. There is a limit to the amount of royalties that can be repatriated through service fees.
The method requires the following documents:
Contract. Commercial Invoice.
Proof of filing with the tax office for amounts over $50,000.
Banks may request additional documentation in accordance with their internal compliance KYC risk management requirements.
Intercompany borrowings between overseas affiliates or parent companies and domestic subsidiaries must be repaid. Therefore, this is not a solution for permanent repatriation.
There are two types of intercompany loans:
A Chinese subsidiary provides loans to its overseas affiliates or parent companies. This may be a way to repatriate funds, although it is not a permanent solution.
The Chinese subsidiary borrows money from its overseas affiliates or parent company. This is not a solution for repatriation.
This type of loan must be handled through the bank in the form of an entrusted loan. Subsidiaries in China cannot send money directly abroad. The transaction must be processed through the bank, which will verify and approve the loan. Such loans provided by Chinese entities to their overseas affiliates are known as entrusted loans. There is a possibility that the bank will reject the company's application. When ** wants to limit capital outflows, banks may also reject the application.
The following restrictions apply:
The company (lender) must have been established for one year or more and have an equity relationship with the borrower (the parent company of the overseas affiliate).
The aggregate amount of RMB loans and foreign currency loans granted by the lender to the borrower shall not exceed 30% of the total owner's equity (adjusted by regulatory dynamics) as determined by the borrower based on the audited financial report of the previous year. Year.
The interest rate should be market-oriented, negotiated between the borrower and the lender within a commercially reasonable range, but must be above zero, otherwise it may be challenged by the tax office.
The loan term is generally from six months to five years, depending on the purpose of the loan. Where the period is more than five years, it shall be reported to the People's Bank of China for the record.
Loans can be renewed, but they cannot be renewed more than once.
The bank will carefully examine whether the scale of the borrower's business is commensurate with the size of the loan, whether the actual purpose of the loan is genuine, whether the purpose is reasonable, and whether the borrower has the ability to repay the loan.
Overseas borrowing. When a Chinese company borrows money from its overseas affiliates and/or parent company, whether it is an inter-company loan or an offshore loan, it must open a special capital account for cross-border borrowing. All funds (including interest) associated with this loan must be settled through this account.
This ratio and parameters are set by the regulator and can be adjusted dynamically. Currently, the company has a ratio of 2. The parameter is 1.
As a result, the maximum amount a company can borrow from overseas is twice the company's capital or net assets. In addition:
The company must have an external debt line, which is the maximum amount that the company can borrow from overseas, which is calculated as follows:
Capital Net Assets x Cross-border Financing Leverage x Macro-prudential Adjustment Parameters = Maximum Borrowing Amount.
The currency used by the company to sign the loan agreement, the funds withdrawn by the company, and the currency used by the company to repay the loan must be the same currency.
If the company's loan is in foreign currency, the company can exchange it for ** RMB for use.
Note: In the past, the external debt quota was the total investment of the company minus the registered capitalCompanies can choose to use this formula or the new formula mentioned earlier and file it with the People's Bank of China's State Administration of Foreign Exchange. In principle, it cannot be changed after the filing is filed. The People's Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE) will later decide on the final management model for cross-border corporate financing.