Repatriation of profits by way of dividends in China
By Ricky W. P. Wong, Wong Brothers & Co. Certified Public Accountants
Foreign invested enterprises (FIEs) in China can distribute post-tax profits to their foreign investors provided that certain procedures and criteria are met.
Before distributing post-tax profits, FIEs are required to make up all losses brought forward from previous years. Additionally, FIEs are required by law to allocate 10% of post-tax profit each year to a statutory reserve fund until the fund reaches an amount equivalent to 50% of the registered capital. Thereafter, the board of directors may declare dividends out of the remaining distributable profits to investors in proportion to their contributions of the registered capital. The following example illustrates how it works:
The audited financial statements of China Sample Co. Ltd. for the year ended 31 December 2015 showed details of net equity as follows:
- Paid up registered capital: 10,000,000 RMB
- Statutory reserve fund: 2,000,000 RMB
- Undistributed profits brought forward: 1,000,000 RMB
- Current year’s profit after enterprise income tax of 25%: 5,000,000 RMB
- Total: 18,000,000 RMB
Based on a board resolution of the directors, 10% of the current year’s post-tax profit, i.e. RMB 500,000, will be transferred to the statutory reserve fund, leaving a balance of undistributed profits of RMB 5.5 million available for distribution. The uses of the statutory reserve are restricted for offsetting losses or for increase of capital.
Dividends paid by FIEs to foreign investors are subject to withholding tax at a rate of 10% unless reduced under double tax agreements (“DTA”) between China and the foreign countries. For example, under the DTA between China and Hong Kong, dividends paid by a FIE to a shareholder domiciled in Hong Kong is subject to withholding tax at a reduced rate of 5%, provided that the shareholder in HK has more than 25% equity interest in the FIE and other conditions under the DTA are met.
In recent years, the State Administration of Taxation (SAT) in China has released several important regulations to avoid abuse of treaty benefits by taxpayers. Only beneficial owners can apply for favourable treatment given under DTAs. Beneficial owners are defined as:
- A person that has ownership and control over the income or the rights or assets that generates such income
- Can be an individual, corporation or other organisation
- Generally engage in “substantive business activities” such as manufacturing, trading and management activities.
Agents or conduit companies without business substance and established for the purposes of avoiding/reducing tax or shifting profits are excluded. The SAT has confirmed that whether beneficial ownership exists should be determined on the basis of a collective assessment of a totality of factors.
The procedures generally applicable to the distribution of dividends in China are:
- An audit on the accounts of the FIE by a local CPA firm should be completed, showing availability of after-tax profits for distribution in the current year;
- Board resolution proposing the payment of the dividends
- Report the dividend distributions to the tax bureaus and pay withholding tax on the dividends (Note: if the reduced tax rate is applied, submit relevant supporting documents for approval)
- Apply to the bank for remittance of the dividends, and the bank will notify the State Administration of Foreign Exchange about the dividend payments via internet.
Ricky W. P. WongWong Brothers & Co., Hong Kong
Mr Wong has been in public practice for over 30 years, and has extensive experience in tax consulting engagements in Hong Kong and China. He is a Vice Chairman of the ITPG for the Asia-Pacific region.
Wong Brothers & Co. was established in 1964 and currently has four partners. It is one of the most reputable CPA firms in Hong Kong. The firm has approximately 90 staff, including professionals and support staff, employed at two offices: one in Hong Kong and the other in Shenzhen, China. Clients of the firm include many international and local companies engaged in different types of business.
Published: October 2016 l Photo: Colourbox.de