There is something all foreign businesses operating in China should know about the big bucks they expect to earn: It just might be easier to earn money in the PRC than it is to get it out. Foreign companies doing business in China rarely plan to spend all of their money inside the Middle Kingdom. Yet getting the profits of a Wholly Foreign Owned Enterprise (WFOE) out of the PRC can be challenging.
China law prevents foreign companies from simply wiring their funds to the bank back home without a legitimate reason and without proper approval. In the business world of China, foreigners are defined as anyone except Chinese nationals and companies incorporated in the PRC. Even individuals or companies from Hong Kong, Macau and Taiwan are considered foreigners.
So how do foreign companies from around the world who are doing business in China get their money out without violating the strict Chinese funds repatriation and tax compliance laws? And better yet, without spending a huge amount of money in the process?
In this series of articles, we will answer these important questions, and more. Stay with us to discover the latest, most successful options for your company to repatriate your funds outside of China.
The safest and surest way to get your money out of China is to hire an expert to help you. Look for a professional with relevant experience, someone whose target is to serve foreign companies and who has the knowledge to keep you out of trouble and your earnings in the bank. A trustworthy consultant can assist your foreign-owned company as you set up your business inside the PRC as well as guide you along the way while you establish a thriving enterprise. This includes making sure your foreign business can safely transfer your hard-earned funds outside China’s borders.
One of the most effective and safe ways for fund repatriation is for a company to declare dividends to a holding company outside of China. And just so you know… the holding company needs to be more than a mere “paper company.” It must be an active company with operations that are truly earning money and that can be evidenced by audited account. This is a crucial point often overlooked by foreign investors who assume a Hong Kong address is a sufficient company. Well, simply put, it’s not. The funds won’t go very far if there isn’t a legitimate company to receive them.
Before a WFOE can send its dividends to its parent holding company outside the PRC, it must first pay China the required Enterprise Income Tax. For most countries, China charges tax on the dividend at 10%. However, if the holding company is registered in a country that has a Double Treaty Agreement (DTA) with China, there is typically a preferred rate.
A DTA is a reciprocal arrangement in which two countries agree to not re-tax repatriating income that was earned and already taxed in the originating country. For example, as DTA recipients with China, Hong Kong and Singapore holding companies enjoy a preferential rate of 5%. In other words, on a $100 dividend the HK holding company will receive $95, with no additional tax in Hong Kong. This is a preferred arrangement, for sure. Who wants to pay more taxes than necessary?
Stay tuned for Part 2 of this series, Latest Update on Ways for Foreign-Owned Companies to Repatriate Funds Outside China. Coming soon.
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.