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Big hopes draw foreign-owned businesses to China. Big regulations make it not quite so easy to get all of that prized money out. Foreign-owned companies face multiple tasks for safely getting their money out of China, but much angst can be avoided by engaging the right help.

One of the safest, and truly effective, ways for a company to navigate the tricky path of fund repatriation is by declaring dividends to a holding company outside of China. This arrangement works even better when the legitimate holding company is in a country that holds a DTA with China, such as Hong Kong or Singapore. (For more, see Part 1 – Latest Update on Ways for Foreign-Owned Companies to Repatriate Funds Outside China)

Another option for WFOEs to get their money out of China is to use a service fee arrangement. Overseas service providers offer an endless list of services such as advisory, IT consulting and software usage, etc. Perhaps most importantly, the overseas providers present a way to deposit money into a bank outside of China. The foreign-owned company within China submits service fees to an overseas service provider’s bank account. In doing so, the funds have been legally repatriated. Generally speaking, a combined tax rate (a combination of VAT and deemed EIT) will be around 17% on the gross amount transferred.

It is critical to keep track of every part of proper documentation, such as the service agreement and contracts, and make sure it is all accompanied by an approved Chinese translation. And remember where you put it… These documents must be available for inspection and approval by the Tax Bureau. In addition, be prepared to prove that at least a minimal level of tangible work has been rendered, and that the fees contracted are reasonable (such as at fair market value). Don’t think your brilliant idea of paying 10,000RMB for a phone call to Hong Kong can work. China’s Tax Bureau will know if you’re trying to cheat the system. So don’t.

It’s not easy for foreign-owned companies to get their money out of China. Strict tax laws with multiple limitations create a notable boundary for your money to cross. But with the right help, you can move your profits over the wall and into your home country bank—legally and efficiently. Some successful methods for funds repatriation include declaring dividends to a holding company outside of China or using an overseas service fee arrangement. (For more, see Part 1 – Latest Update on Ways for Foreign-Owned Companies to Repatriate Funds Outside China)

 However, if your company happens to be manufacturing or trading products in China, you have a unique option for getting your profits out of the country. Consider using Hong Kong as an intermediate trading hub.

Many Hong Kong buying offices have hosted this option for foreign companies over the past few decades. Although the PRC has changed a lot, going through a Hong Kong company still has its advantages in terms of logistics, banking, and communication. Here’s how it works: Foreign-owned manufacturing or trading companies located within China sell their products to a Hong Kong company, which then resells the products at a higher profit to the final customer in other countries. The additional profit, minus the tax benefit, can be retained in Hong Kong without any foreign exchange restriction.

When using Hong Kong as a trading hub, it is advisable to have a physical operation there as well. If your products are flowing through HK without any sign of an actual manufacturing or trading location, the Tax Bureau in PRC or other countries can view Hong Kong as merely a shelter for tax avoidance. Definitely something you wish to avoid. Set up some “substance”—a small office with real people at the very least—to enjoy the real benefit of your Hong Kong hub relationship.

To receive the full benefit of all of your efforts in China and to be able to send your money back home, follow the right steps. And engage the right service providers to help you. It’s too costly otherwise.

Philip Yu
Fung, Yu & Co. CPA Limited / Harris Corporate Solutions

About the author: Philip YU heads his family practice Fung, Yu & Co CPA Ltd and Harris Corporate Solutions that established in 1973. Philip and his team caters more than 2,000 entrepreneurship companies, mid-size private companies and listed companies for their in-bound investment structuring, compliance and profit repatriation in Hong Kong and China through their offices in Hong Kong, Shanghai, Beijing, Guangzhou and Paris.

Philip was graduated from the University of Toronto in accounting, and then an LL.B (law) degree from the University of London. He is a qualified accountant in Hong Kong, US and Australia.