Getting money out of China – Cash repatriation

By Richard Hoffmann, ECOVIS Beijing China

As the Chinese domestic market is growing quickly and foreign companies are making profit, it is necessary to think about strategies to get the cash out of China. Many companies not only produce in China but also sell their products in China or for example to their foreign headquarter. This is also known as the China cash trap and is a problem faced by almost all foreign invested companies in China. This often leads to an increasing need for repatriation of earned profits, back to their foreign headquarter or other foreign companies. Chinese regulations are strict and you need to figure out ways which will not only decrease your tax burden but which will also be easy to implement into your business operations. In the process of finding ways to get through the Chinese foreign exchange control you need to focus on your business needs as well as on all the other stakeholders, which are involved in your decisions like e.g. the Chinese tax authorities.

In the following you will find the most common ways of repatriating money from China to abroad.

1. Dividend payment

Paying dividends to your foreign headquarter seems to be the easiest way to handle cash repatriation but it’s not necessarily the optimal solution for you. Depending on the location of the receiving company, dividends will be taxed with 5 to 10 Percent, which is enormous if you consider that you could also use this money and reinvest it inside China. In the past it was common to have a Hong Kong company and directly transfer money from mainland China to that entity. This now has changed and requires an “operational” Hong Kong company, which means that you have to have people working for that company. It is unclear how many people are needed and what profession they must have. This will depend on a case by case decision made by the authorities.

But one of the most important problems that many companies face is the lack of profit in their books. That means they made profit in mainland China but cannot proof this with receipts and Fa Piao. This will be a problem, when Chinese authorities want to check how the profit was realized. Or it also happens that out of the fact, that larger companies have assets which can be depreciated so that profit in the books will be reduced, and as a result no profit exists that can be transferred. Furthermore the authorities will check if the receiving company, which needn’t be the head quarter, has only been set up for tax saving purposes.

2. Reduction of Registered Capital

One option to get some of your earnings out of China could be to reduce the registered Capital of your company. If you plan to try this, make sure to have good arguments for doing so, because the involved authorities might see that as de-investment. That means not only might they be unhappy with your decision but they could also try to interfere your plans. Chinese law restricts registered capital reduction and thus you also have to comply with the current regulations and duties which, according to the Company Law of P.R. China are for example:

1. The registered capital of the company after reducing its registered capital shall not be lower than the minimum amount required by laws.
2. In case of reducing its registered capital a company shall go through modification registration with the company registration authority according to law.
3. Where a company finds it necessary to reduce its registered capital, it must work out balance sheets and checklists of properties

3. Service Fees

If you provided services within China, but don’t have a service entity, you might want money to be directly transferred abroad. Here you are at risk of getting the status of a permanent establishment a service entity in that case, although you just have staff like e.g. mechanics in China for a certain amount of time. Up to the nationality of the worker and the existing or not existing bilateral agreements, such an entity will automatically be established after 183 days after the project has begun. If no bilateral agreement exists, this time will only be 90 days. The goal here should be to avoid the status of a permanent establishment and thus safe taxes.

4. Transfer Pricing

Inter company payments are part of systematic cash repatriation strategies for many companies, active in China. Such payments can include License fees, Royalties, Interest or purchase of depreciable assets like e.g. intangible assets and also service fees for services provided by the foreign company. All of these transfers will ultimately lead to profit reduction of the China based company and thus result in lower taxable profit. Paying the headquarter or the respective company for example in Hong Kong or Singapore for trade mark licenses or other intangibles is one of the strategies many companies already implemented. But it has to be handled carefully if the China entity is in consistent loss, or retains a very low profit rate which is down the industry level.

5. Offshore Loan

If the foreign company outside of China provides a loan to the Chinese company, there will be interest that has to be borne by the loan receiving company. Here the applying dept-equity ratio, which depends on the total investment, must be considered. There exist certain stages of total investment, which in short allow for higher loans the higher the total investment will be. The interest is subject to 5% Business Tax, and 10% withholding tax.

6. Asset Acquisition

If a foreign company A for example owns two Chinese companies B and C and wants to sell its investment C, then it could sell C to company B and later on get the cash back via intercompany services or other tax reduces / free solutions, provide to company B.

Beside these points you might also consider to register your Chinese headquarter in the right area, as this will have an impact on the CIT rate that will be applicable. For example in Wuqing, which belongs to Tianjin near Beijing, where some companies are probably still enjoying reduced CIT rates.

For your future success you might take these recommendations into consideration:

1. Cash-flow into China on a needed basis
2. Maintain proper documentation
3. Correct classification of payments
4. Avoidance of mixed contracts
5. Optimization of Transfer Pricing strategy
6. As the Chinese tax bureaus of each province are independent in many of their locally handled tax issues, you have to take their interest into consideration as well (Point 2).

If you need help with finding the optimal solution for your company let us assist you and contact us at Ecovis Beijing. If you want to get monthly updates on tax and legal regulations register for our newsletter. Our LinkedIn Group FocusChina is now opened become a member now!