Foreign-invested enterprises (FIEs) in China must distribute profits to their overseas shareholders following China’s corporate laws. Furthermore, the profits are typically given out through a dividend distribution which is processed within a year. Dividend distribution also takes place when transferring shares from selling a company in China. It involves tax implications that may be a big concern for foreign investors.
Read our previous article about Tax Implications of Selling Your Company in China
Receiving profit is always the top priority of business shareholders whether in China or other countries. For them, profit repatriation is an assurance of their fruit of investments. Thus, it is crucial to understand certain policies and procedures surrounding the distribution of dividends.
When is the dividend allowed to distribute?
It is quite challenging to distribute profits to shareholders considering the strict flow of foreign exchange in and out of China. Moreover, there are other existing laws and regulations associated with tax settlements as well as transfer pricing rules in the country.
Nevertheless, FIEs may send dividend payments to their shareholders if the following conditions are satisfied:
- Passed the annual audit;
- Settled tax obligations (i.e. CIT, VAT, business tax) and paid other outstanding taxes;
- Made up the losses from the previous years;
- Paid-up the registered capital or a capital injection scheduled as set out in the Articles of Association;
- Obtained the approval of the shareholders via a resolution;
- Contributed 10 percent of the after-tax profit to a statutory reserve fund.
The FIE can discontinue putting money into its statutory reserve funds when its total contribution reaches more than 50 percent of its registered capital. Moreover, it can also allocate a general reserve fund from its after-tax profits. Normally, banks have a dividend distribution policy where they have to maintain a general reserve no less than 1 percent of their risk-bearing assets from their after-tax profits.
Can shareholders enjoy relevant tax incentives?
An FIE must withhold taxes on behalf of its shareholders and check whether they could enjoy preferential tax treatments.
For instance, there is a double taxation relief accorded to foreign investors who are from countries having a tax treaty with China. The foreign shareholder, therefore, may qualify as a beneficial owner and a preferential corporate income tax (CIT) rate may apply.
Find out more about the double tax agreement here: Double Taxation Relief for Foreigners in China
Foreign shareholders can also qualify for tax deferral treatments if they decide to reinvest their dividends. That is, they invest in projects or sectors which are not in China’s Negative List of industries.