Now that the annual audit cycle and tax filing season are over in China, companies that have profits retained may now wish to distribute these as dividends. The experience is relatively straightforward, albeit still bureaucratic, all of which is covered in this article.
Annual audit process
To repatriate profits and dividends, a company usually has to go through an annual audit which requires a statutory annual audit report, Corporate Income Tax (CIT) reconciliation report and other supporting documents as required by the bank.
The process begins with the tax authorities confirming the total amount that can be repatriated after checking if the CIT has been paid, the losses have been used for offset and covered, and if the reserves fund has been withdrawn or needs replenishing (see below). All taxes must be cleared with the tax bureau before any payment can be made.
It is possible to make a triple agreement between a Chinese Permanent Establishment, bank and local tax bureau to deduct any withholding tax routinely, making sure all tax requirements are met to facilitate transactions out of China.
The Reserves Fund is made up of 10% of the net annual profits building up until the total reserve fund equals 50% of the company’s total registered capital in China. However, the reserve fund can be used to cover losses, cover operational costs, or be reinvested in the company.
These procedures are usually performed around June or July after the annual audit is completed for the previous year-end, which will then allow the company to repatriate the funds from the year the audit covers.
Foreign investment entity audit requirements
A Foreign Investment Entity (FIE) can postpone profit distribution to the next year, but if a payment is needed for profits that have not been audited, then an interim audit would be required. However, how much of the profit the FIE will share, or not, must be decided amongst its shareholders and a profit distribution plan to be drafted amongst the FIE’s directors and executives. Once approved, the interim audit can then be completed to repatriate profits.
To repatriate the profits, the FIE has to withhold the relevant taxes and submit the file to the tax bureaus within seven days before the tax obligation arises.
Double tax avoidance agreements
Those who are tax residents of a country that has a Double Tax Agreement (DTA) with China can submit the related documentation to the tax bureau in charge to receive any treaty benefits.
The China tax regulations provide that the standard withholding tax on dividends is 10%, but under some DTA’s such as Hong Kong, Singapore, United Kingdom, etc., there is a reduced rate of 5%. China has beneficial ownership regulations that cover the substance of the parent of the FIE that will receive the dividends, which determine whether or not the treaty benefits can be applied.
Which transactions must receive approval from the tax bureau?
The transactions of profits above USD 50,000 must get the approval of the tax bureau; a transaction below USD 50,000 can be done without the tax bureau’s pre-approval. Transactions of up to USD 200,000 will need approval from the tax bureau, and the bank making the exchange will have to report to the State Administration of Foreign Exchange (SAFE).
In the event of an overseas transaction remaining below USD 50,000, the bank will only need the annual audit report, corporate income tax (CIT) reconciliation report, and any other documentation legitimising the company.
For an overseas transfer above USD 200,000, the company will have to provide the bank with the Record for Overseas Payment Form, with the seal from the tax authorities, on top of the aforementioned documentation.
Once the bank has been given all the documentation, it will proceed to confirm all the information. In the case of a transaction being above USD 200,000, the bank will have to wait for SAFE to authorise the transaction. After everything has been confirmed, the transaction can be made.
How long does the process take?
The entire process assuming the annual audit is complete, will take about one month. The more significant the transaction, the more time it may take for the bank to prepare, and if the transaction is above USD 200,000, it will take 15 days for the tax bureau to issue the sealed Record for Overseas Payment Form however it can be done while waiting for the bank to prepare.