Documentos de Académico
Documentos de Profesional
Documentos de Cultura
p.
Introduction
When setting up in China, foreign investors are often confronted with complex
tax compliance issues and licensing procedures, paying scant regard to one of
the most important parts of overall business planning: the effective maximization
and subsequent repatriation of profits.
China maintains a strictly regulated system of foreign exchange controls,
meaning funds flowing into and out of China are tightly regulated. Therefore,
for foreign companies with subsidiaries in China, repatriating cash from their
subsidiaries has always been an important and challenging issue. It is important
to incorporate a profit repatriation strategy into the set-up planning of a
subsidiary in China to ensure ones ability to access the profits it earned.
In this issue of China Briefing, we guide you through the different channels for repatriating profits,
including via intercompany expenses (i.e., charging service fees and royalties to the Chinese subsidiary)
and loans. We also cover the requirements and procedures for repatriating dividends, as well as how to
take advantage of lowered tax rates under double tax avoidance treaties.
Kind regards,
Sabrina Zhang
National Tax Partner
Beijing Office
Dezan Shira & Associates
china@dezshira.com
www.dezshira.com
For Reference
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of Dezan Shira Group.
Content is provided by Dezan
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may be accepted for any of its
contents. For queries regarding
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Regulatory Framework
p.
p.
It is important to
incorporate a profit
repatriation strategy into
the set-up planning for
a subsidiary in China
to ensure ones ability
to access the profits
earned.
ASIA BRIEFING
?
China Further Eases Foreign Exchange
Control over Capital Accounts
General VAT Taxpayer Status: Why Its So Critical And How To Secure It
VIETNAM BRIEFING
INDIA BRIEFING
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For foreign companies with subsidiaries in China, repatriating cash from their subsidiaries has always been an important and challenging
issue. China maintains a strictly regulated system of foreign exchange controls, meaning funds flowing into and out of China are tightly
regulated. It is important to incorporate a profit repatriation strategy into the set-up planning for a subsidiary in China to ensure ones ability
to access the profits earned. Adopting the right strategy to optimize profit repatriation from China can result in significant cost savings.
There are several ways of repatriating cash from China, the most obvious being for a companys entity in China to pay dividends directly
to its foreign parent company. However, this is subject to certain prerequisites - only profits that have undergone annual audit can be
repatriated using this channel, ensuring that the gross profit will be subject to a 25 percent Corporate Income Tax (CIT). Further, a foreigninvested enterprise (FIE) can only distribute dividends out of its accumulated profits, which means that its prior accumulated losses must
be more than offset by its profits in other years, including the current year.
An FIE also has to place 10 percent of its annual after-tax profits into a reserve fund until it reaches 50 percent of the FIEs registered capital.
The dividends are subject to a further 10 percent withholding CIT when distributed to foreign investors. The chart below illustrates the tax
burden and reserve requirement applicable to dividends in China before they can be remitted abroad. We address the requirements and
procedures for repatriating dividends in detail in the next article.
Item
Gross profit
CIT
Net profit
Surplus reserves
Maximum dividend
Withholding CIT
Net payment
Formula
(1)
(2)=(1) x 25%
(3)=(1)-(2)
(4)=(3) x 10%
(5)=(3)-(4)
(6)=(5) x 10%*
(7)=(5)-(6)
Amount
200.00
50.00
150.00
15.00
135.00
13.50
121.50
* If a double tax avoidance agreement (DTA) is available and the parent company qualifies as the beneficial owner, a preferential dividend
withholding CIT rate of 5 percent may apply.
Based on the abovementioned constraints, many multinational corporations have adopted certain implicit policies, such as minimizing
their profits in China in a legitimate manner via intercompany payments, i.e., charging their Chinese unit royalty or service fees. Although
these transactions will be subject to turnover tax, and, possibly withholding income tax, the fees are deductible from the CIT taxable
income and exempt from the 25-percent CIT, resulting in significant cost savings.
In the following pages, we discuss the procedures and requirements for remitting service fees and royalties to a foreign parent company
from a subsidiary in China.
We recently assisted a Spanish client in China who was looking at reducing their overall profits tax bill. By
utilising the China-Spain DTA and discussing this with the local Chinese tax authorities, we were able to
obtain permission to build into the clients overall tax planning structure a mechanism that would allow
Jim Qiao
Manager
Corporate Accounting Service
YRD Region
Dezan Shira & Associates
the Spanish parent to charge their China WFOE for a number of legitimate service costs and royalties. As
a result, we significantly improved upon the clients overall profitability by substituting lower withholding
tax rates in place of higher profits tax rates on several items. This resulted in an annual six-figure (Euros)
increase in overall tax savings for the parent company.
Service Fees
Parent Company
FIE
parent company
Service fees paid to overseas related parties are deductible for CIT purposes provided they are directly related to the FIEs business
operations, charged at normal market rates, and all applicable taxes have been withheld. This lowers the taxable income for the FIE. The
service charges between a China parent company and its China subsidiary must be based on the arms length principal. Service fees are
subject to value-added tax (VAT) or business tax (BT), as well as other surtaxes, such as urban construction and maintenance tax (UCMT),
education surcharge (ES) and local education surcharge (LES).
China is currently undergoing a VAT tax reform with the aim of gradually replacing its BT system with a VAT system. VAT rates range between
six percent, 11 percent, or 17 percent depending on the service provided, with six percent being the most common rate. If the FIE is a VAT
general taxpayer, it can claim input taxes to decrease the tax burden. The service provider (i.e., the HQ) is liable for these taxes, and the
service recipient (i.e., the China subsidiary) is responsible for withholding and paying these taxes before remitting the service fees to the HQ.
Example
The service fee (for services provided by the HQ offshore) charged to the Chinese subsidiary is RMB1 million.
VAT
UCMT
ES
LES
Service agreements signed between a WFOE and its foreign parent company must be supported
by the facts. If the tax authorities become suspicious of the authenticity of the content of a service
agreement and the legitimacy of service fees remitted, and the WFOE is not able to provide clear and
convincing evidence to support them, a 25 percent CIT may be imposed on the service fees since it will
not be deemed an expense of the WFOE.
--- Jim Qiao, Manager, Corporate Accounting Service, Dezan Shira & Associates
Services rendered outside China are exempt from CIT (but still subject to VAT or BT). The Chinese company should specify the offshore
services that it received in the relevant service agreements and be prepared to clarify the nature of the services in case the tax bureau
challenges it. If the services are or deemed to be provided in China, the service fees will be subject to CIT at 25 percent, calculated on the
deemed profit rate of 15-50 percent. CIT exemption may apply under a DTA.
If there is a DTA in place between China and the jurisdiction in which the parent company is incorporated, the services provided in China
by the overseas parent company through its employees or personnel may be exempt from CIT, provided the service period falls below
a certain time threshold. However, if such activities continue (for the same or a related project) for a continuous or cumulative period of
more than six months or 183 days within any 12-month period, a permanent establishment (PE) will be constituted, and the service income
attributable to the PE will be subject to 25 percent CIT. Therefore, the Chinese subsidiary and HQ should carefully manage contracts and
related projects in China to assess and mitigate the PE liabilities.
It is important to note that the tax officer always has the right to call into question the legitimacy of a service agreement into question.
To prove that the service fees remitted are based on genuine transactions, the taxpayer should be prepared to provide further evidence,
including a detailed service agreement to clarify the nature of the services provided. The agreement should state the service items, the
nature and location of the services provided, the relevant service descriptions, as well as the basis for calculating the service fee amounts.
for
Step 3 Application
Treaty Benefits
Royalty Remittances
Parent Company
Charge FIE royalty fees
FIE
parent company
proprietary technology
Example
VAT
UCMT
= RMB56,600 x 7% = RMB3,962
ES
= RMB56,600 x 3% = RMB1,698
LES
= RMB56,600 x 2% = RMB1,132
RMB842,303.
Loans
A WFOE may also remit undistributed profits to a foreign related company with which it has an equity relationship by extending a loan.
The WFOEs interest income will be subject to 25-percent CIT and 5-percent BT, although the CIT paid in China may later be used to offset
income tax liability incurred in the foreign country if there is a DTA in place.
June 2014 | CHINA BRIEFING - 7
Repatriating funds through an offshore loan has traditionally not been very common because of the intricate remittance procedure and
repayment issues. Under the previous SAFE regulation, if a WFOE wanted to extend a loan to its overseas shareholding company, it would
have first to obtain SAFE approval, which would usually take one to two months. It would also have to specify the repayment period in
the loan contract, which means the overseas shareholding company would have to repay the money within a certain time limit. Further,
overseas lending was previously limited to the overseas parent companys share of profits in the China WFOE.
The situation has now changed, and a new regulation (Circular 2) was promulgated by SAFE in January 2014. Under Circular 2, offshore
lending is limited to 30 percent of the owners equity in the Chinese WFOE unless special approval has been obtained from SAFE. It replaces
the formal approval requirement with a more streamlined record-filing procedure if the amount involved is less than 30 percent of the
owners equity in the WFOE. The Circular further relaxed the two-year restriction on loan terms, so that WFOEs apply for a longer-term
offshore loan according to their business needs. Although the approval process for offshore loans has been simplified, it remains to be
seen how this will be interpreted and implemented at the local level.
Case Study
Company B, located in China, is a joint venture set up by the U.S. Company A. Company A owns a 25-percent share in Company B, which
manufactures vehicles using key technology imported from Company A. The two companies have entered into various agreements
regarding the use of trademarks and royalty fees. Company B properly withheld CIT when remitting royalty fees to Company A, but did
not withhold CIT when remitting US$20 million in service fees to Company A. Questioning the nature of the remitted funds, the tax
authority requested that Company B provide the contracts pertaining to the payment of service fees. Company B provided a contract
titled Engineering Service Agreement, covering Company As provision of offshore technical support for R&D, certification and testing,
as well as engineering work for the licensed product; as well as various training given to Company Bs personnel with regard to the
licensed product.
Company B believes that since all of the abovementioned services were provided offshore, the service fees should not be subject to
CIT in China. The tax authority conducted a comprehensive analysis of Company Bs previous technology licensing agreements in
conjunction with the service agreement and concluded that the services covered in the service agreement were provided as support
and guidance to the licensee for using the technical know-how for vehicle manufacturing. Therefore, the service fees should be deemed
royalty fees and thus subject to 10 percent withholding CIT.
If you have any questions regarding your companys profit repatriation strategy in China,
please email china@dezshira.com
By Jim Qiao, Jenny Liao and Eunice Ku, Dezan Shira & Associates
In the previous article, we discussed various channels for remitting funds to the parent company, including service fee and royalty payments,
and extending loans to the parent company. However, because these methods may not always apply and some funds may have to be
repatriated as dividends, in this article, we address the requirements and procedures for remitting dividends.
As mentioned in the first article, only profit that has undergone annual audit can be repatriated. Annual audit for tax compliance conducted
by the local tax authority is usually completed around June or July every year (see accompanying timeline). The audit allows the State
Administration of Taxation (SAT) to make sure all corporate income tax (CIT) has been paid up with regard to the profits being distributed.
In addition, no profits can be distributed before losses from previous years have been made up, after which the remaining balance will
be available for redistribution. The tax authorities will confirm how much a company can repatriate based on the net profit percentage.
When remitting the funds, banks will generally require an audit report and annual CIT return to substantiate the distributable profit for the
year. If the company chooses to postpone repatriation to the following year because of cash flow concerns, an additional special audit
report will be required.
Feb
Mar
Apr
May
June 30
Deadline for Annual Inspection
June
July
Aug
Sept
Oct
Nov
Dec
--- Jim Qiao, Manager, Corporate Accounting Service, Dezan Shira &
Associates
Example
A WFOE was set up in 2011, its net profits in 2011, 2012, and 2013 are shown in the chart below:
Year
2011
2012
2013
Step 1
Step 2
Step 3
Board of Directors/
Executive Director of WFOE Drafts Profit
Distribution Plan with Shareholders Approval
Step 4
Step 5
Step 6
Dividend Remittance
Companies repatriating dividends need to be aware of whether or not there is a double taxation
avoidance agreement (DTA) in place between China and their home country, which can reduce the 10
percent withholding tax on dividends to 5-8 percent. This is not something that tax authorities will bring
to their attention. The process of applying for DTA benefits is quite tedious a preferential tax treatment
form needs to be submitted and the parent company must obtain certain forms of documentation from
the government of the DTA country/region in question.
Jenny Liao
Senior Manager
Corporate Accounting Services
Shanghai Office
Dezan Shira & Associates
Many offshore share companies are set up in locations that have DTAs in place
with China, such as HK, but the actual investor may be in the U.S., for example.
Since there is no reduced withholding tax rate under the U.S.-China DTA, setting
up in HK allows them to benefit from the reduced rate of 5 percent withholding
rate on dividends under the HK-China DTA. To ensure that the HK presence is not
merely a shell company, tax authorities need to know whether the company has
actual operations and is paying taxes, since DTA benefits only apply if it is a real
company.
Albania
Georgia
Malta
Slovenia
Algeria
Germany
Mauritius
South Africa
Armenia
Greece
Mexico
Spain
Australia
Hong Kong
Moldova
Sri Lanka
Austria
Hungary
Mongolia
Sudan
Azerbaijan
Iceland
Morocco
Sweden
Bahrain
India
Nepal
Switzerland
Bangladesh
Indonesia
Netherlands
Syria
Barbados
Iran
New Zealand
Tajikistan
Belarus
Ireland
Nigeria
Thailand
Belgium
Israel
Norway
Bosnia-Herzegovina
Italy
Oman
Tunisia
Brazil
Jamaica
Pakistan
Turkey
Brunei
Japan
Turkmenistan
Bulgaria
Kazakhstan
Philippines
Ukraine
Canada
Korea (R.O.K.)
Poland
Croatia
Kuwait
Portugal
United Kingdom
Cuba
Kyrgyzstan
Qatar
United States
Cyprus
Laos
Romania
Uzbekistan
Czech Republic
Latvia
Russia
Venezuela
Denmark
Lithuania
Saudi Arabia
Vietnam
Egypt
Luxembourg
Zambia
Estonia
Macao
Seychelles
Finland
Macedonia
Singapore
France
Malaysia
Slovakia
June 2014 | CHINA BRIEFING - 11
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