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Tax Insights

2018-06-30
1028 | 42 | 5

How easy is it to repatriate funds from China to overseas?

Repatriation of funds from China to overseas has always been an important and challenging issue for multinational corporations operation in China. Multinational corporations are subject to a phenomenon known as the “cash trap”, meaning that while their affiliate’s or subsidiary’s operations in China may be profitable, there are no legal and effective means of getting out those profits out of China, in a sense a portion of the profits is effectively trapped in the country.



Because China still officially considers itself a developing economy, it maintains a strictly regulated system of foreign exchange controls. Funds flowing into and out of China are tightly regulated so that, for certain inter-company transactions between affiliated companies, the incorrect handling of the registration and approval procedure can result in situations where the intended transactions (such as the remittance of a loan or if services or royalties failed to meet the foreign exchange regulatory requirements and become illegal or worse) simply cannot be successfully made. Some of the regulations can be introduced below:


1) For foreign-invested enterprises in China, the PRC Company requires that 10% of its annual after tax profits be placed into a legal reserve. Based on tax treaty, some countries and area can adopt 5% of the preferential tax rate. For instance Singapore, and Hong Kong etc. But this 5% preferential tax rate have to be filed at the Chinese tax bureau before making the payment, otherwise only 10% withholding tax rate can be adoptable. Regarding the filing at the Chinese tax bureau, you have to know, not every application will be passed through. So for more detail, you can share the specification with RTF international tax experts.


2) Foreign-invested enterprises with a relatively large amount of fixed assets or amortizable intangibles on its books can classify these as profits and therefore distribute these as dividends, reduced by the non-cash expenses deductions such as depreciation and amortization. However, while in other countries without a restrictive foreign currency system that allow the reduction and outward remittance of capital, it is virtually impossible for a foreign-invested enterprise to reduce and remit its capital to its foreign investors. RTF international foreign experts would like to share the solution with those foreign companies who want to get the investing return back to the overseas shareholder, you can use the capital decreasing way to get your investment back. For more details, just feel free to contact us at nancy.wang@rtfcpa.com;


Therefore, as a practical matter, only 90% of a foreign-invested enterprise’s after-tax profits can be remitted on an annual basis, assuming that it does not have any accumulated losses. 


To face this perceived cash trap in China, many multinational corporations have adopted certain policies, for instance:


1) Minimize their capital into China unless there are clear business objectives that require it.


2) Repatriate funds through inter-company payments, as part of their transfer pricing strategy, minimize their profits (that is, keep profits low) in China in a legitimate manner and therefore reduce their exposure to the cash trap risk.


Despite all these complications, RTF can still help to repatriate funds to your foreign investor whether it is through dividends distribution or through a service contract. Our main aim is to repatriate the funds by incurring the least amount of withholding taxes, where the standard rate for corporate income tax (CIT) withholding taxes is 10%. The factors that RTF will take into account are:


1) Analyse if funds can be repatriated via a service agreement, instead of distribution of dividends, where the withholding tax can be exempted, taking into consideration there are no royalties, licensing fees, and so on involved.


2) Verify if there are any double tax treaty between China and the foreign investor’s country of residence.


3) Check that the enterprise is not classified as having a Permanent Establishment (PE) in China. In the existence of PE, the full amount of withholding taxes will be accountable.


4) Check if the contract prices are at arm’s length value to avoid any transfer pricing risks.


5) Make sure there are any other risks involved.


For more information about how RTF can help your enterprise to repatriate funds at the lower cost and risk, please feel free to contact our tax experts. RTF is one of the most influential tax strategy consultancy and financial services firms for foreign investment enterprises across Asia. Founded in 2008, we employ over 100 employees across our Beijing headquarters and our offices in Shanghai, Shenzhen, Hong Kong, Singapore and New York. We specialize in providing our international clients with expert financial, legal and tax consultancy services. Also, please visit our website at www.rtfcpa.com.sg/.

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