Profit Distribution and Repatriation

Profit Distribution and Repatriation

Foreign investors may repatriate profits from a Foreign Investment Enterprises (“FIEs”) without restriction subject to compliance with certain procedural requirements. Dividend cannot be distributed and repatriated to oversea if the losses of previous years have not been covered while dividends not distributed in previous years may be distributed together with those of the current year. Repatriating the Registered Capital to home countries is forbidden during the term of business operation.

Prior to the distribution of after-tax profit, however, FIEs are required to allocate a certain rate of after-tax profit, determined by the board of directors, to reserve funds, enterprise development funds, staff incentive and welfare funds. Wholly foreign owned enterprises (“WFOEs”) are required to allocate 10% of their after-tax profit to the reserve fund and cannot reduce this rate until the fund reaches an amount equivalent to 50% of the registered capital.

Equity Joint Ventures may distribute profits according to the proportion of capital contribution by the investors; Cooperative Joint Venture should follow the terms as stated in their contracts; whereas WFOEs may distribute profits according to their articles of association.

The procedures for profit repatriation are as follows:

1. Submit the following documents to bank:

(1) tax payment statement and tax return;
(2) audited financial statements;
(3) resolution of the board of directors on dividend distribution;
(4) foreign exchange registration certificate;
(5) credit report prepared by an accounting firm; and
(6) such other documents as requested by SAFE

2. Bank verifies the submitted documents;

3. Bank completes remittance procedure; and

4. Bank reports to local SAFE for records.

The New PRC Enterprise Income Tax Law (“EIT Law”) entered into force on January 1, 2008. The new standard EIT rate is 25%. The reduced EIT rate of 20% applies to small-scale enterprises and the preferential EIT rate of 15% applies to high/new technology enterprises whose qualification shall satisfy certain criteria stipulated by the State Council.

Pursuant to the new EIT Law, dividends, bonus and other equity investment proceeds distributed between qualified resident enterprises shall be tax –free incomes. PRC implementing Rules of the Enterprise Income Tax Law (the “Rules”) also provide that 10% withholding tax now applies to all dividends distributed to its foreign investors by Chinese enterprise (FIE is deemed to be a PRC legal entity). Since Hong Kong, Singapore and Mauritius have entered into arrangements with China reducing the withholding tax rate to 5%, these jurisdictions are now the popular choice for foreigner investors to use for their investments into China.

(This article is prepared for reference purpose only, and should not be construed as legal advice. You are welcome to send your comments to the author.)

Author: Helen Yan - Attorney at Law, Member of PRC Bar Association
Tel: 0756-3229508 Mobile: 13928008926
Email: yanhailing@yahoo.com