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Profit Repatriation for Foreign Invested Enterprises in China

Updated:2018-5-2 14:28:13    Source:www.tannet-group.comViews:109

Profit Repatriation for Foreign Invested Enterprises in China may be a common concern for those foreign investors when setting up a business entity in the country. In financial terms, repatriation is the process of converting a foreign currency into the currency of one's own country. China allows foreign invested enterprises (hereinafter referred to as FIEs) to repatriate their profits out of the country and it is important to understand the various mechanisms for doing so in order to most efficiently access your China-sourced profits.

The State Administration of Foreign Exchange (SAFE) is the government bureau tasked with controlling capital flows into and out of China. Flows are strictly controlled and FIEs should be careful to avoid raising any red flags with the authorities.

Ways of profit repatriation 
There are several ways to repatriate profit from China, the most obvious being for a company’s China-based entity 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 25 percent CIT. Dividends are subject to a further 10 percent withholding CIT when distributed to foreign investors.

All methods of repatriation are subject to strict controls by the State Administration of Foreign Exchange (SAFE). Unless the reserve fund's capital is at least equal to 50% of the reserve capital, wholly foreign owned enterprises (WFOEs) and foreign invested commercial enterprises (FICEs) must allocate 10% of their posttax income to their reserve fund.

When to conduct repatriation
Profit repatriation can only be conducted once a year after the annual audit has been completed. The purpose of the audit is such that the State Administration of Taxation (SAT) can make sure all corporate income tax (CIT) has been paid up with regard to the profits being distributed. This is why all FIEs are required to go through the annual audit for tax compliance conducted by the local tax authority, which is usually completed around June or July every year.

Many companies prefer to keep some profit in China for future investment and expansion or in case of unexpected fees. To support this, regulators are far more likely to consider repatriation of a form of tax avoidance in China if all profits are repatriated. This becomes more significant when firms do not have true substance where profits are being repatriated. If authorities are able to prove that there is not true substance you may be subject to fees.

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