Transfer Funds Out of China

Have you ever tried to transfer your company money out of China? If so, you probably know that this is a challenging task. Ever wondered why? Well, the main reason is a strict policy that tightly regulates cross-border funds flowing.

Foreign-owned companies can choose between three main channels to transfer profits outside of China. They must carefully consider the pros and cons of every alternative, with regard to their company’s unique situation:

1. Paying dividends to the parent company

2. Intercompany payments (e.g., service fee, royalty, reimbursement)

3. Intercompany loans

Dividend payments

Remitting profits as dividends is a customary path opted by many companies. In this channel, the surplus is converted into shares that are distributed to the company’s shareholders (based on their proportional ownership of the company). The amount of profits to be distributed as dividends is determined by the company’s Board of Directors / Executive Director.

Pros:

• The most common and direct way

• Relatively less regulatory intervention, compared to other channels

Cons:

Dividend payment is subject to several prerequisites and limitations:

• The company’s registered capital amount has to be shown as fully injected.
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• Profits can be transferred only once a year, after the annual audit is conducted and the annual CIT report is filed (i.e., after May).
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• Accumulated debts and past losses have to be paid.
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• The company has to allocate 10% of its profits (after CIT deduction) to a reserve fund. The process continues until the company reaches 50% of its registered capital deposited in the reserve fund.
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• A withholding tax is levied on the dividends paid. Its rate (0-10%) depends on the availability and terms of a Double Tax Avoidance Agreements (DTA) between China and the company’s country of origin.

Intercompany payments

Another alternative for WFOEs is transferring funds to the parent company by intercompany payments, which include:

• A service fee, for instance, marketing, management and technical services

• Royalties, for instance, IP and trademarks

• Reimbursements, for instance, taxes incurred on employment salaries and IT facilities

Pros:

• These payments are exempt from the 25% CIT payment

• Transactions can be made based on the company needs, and are not limited to once a year

• There are significantly less restrictions

Cons:

• Processes are much more controlled and scrutinized (for instance, if the service fee is considered too high and unreasonable by the authorities, they will impose CIT)

• Service fees and royalties are subject to VAT

Intercompany loans

Intercompany loans are yet another channel to explore. Intercompany loans can be divided into two: inbound loans (in which the parent company lends money to the Chinese subsidiary through interest payments), and outbound loans (in which the Chinese subsidiary lends money to the parent company). This channel is applicable only if there is an equity relationship between the two companies. 

Pros:

• Extension of loans is tax-free (tax is imposed only on the interest)

• Extension of loans can take place in accordance with company needs

Cons:

• This channel is the most vulnerable to SAFE’s scrutiny

• Both inbound and outbound loans are limited to 30% of the registered capital

• All business-related taxes are imposed on outbound loans

• Outbound loans can be provided only after the first year since the establishment in China

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