Getting your profits out of China ironically begins before you have made any. The assumption in China seems to be that any business coming here needs to be very specific about every detail of what they intend to do.
Hundreds of companies and individuals can attest to this. Mostly out of ignorance, but not always, many overseas companies fudged their company registration and licensing submittals. Other than ignorance, the most common excuses are cost, complexity and/or timing issues. The idea was that all could be mended with a few amendments. The tearful stories of lost profits, and in some cases quick exits, can be heard at cocktail parties and corner bars.
Unfortunately, the same mistakes are still being made every day.
As with most countries, China wants foreign investment and will do their best to attract it, but they feel no urgency about helping firms take their profits out.
So, to make a long story short, when you set up your Chinese company, you need to sit down with a knowledgeable consultant and figure out the best legal ways of repatriating your profits, assuming you make some.
To prepare for this article, I sought the insights of Nicolas Frishmann, founder and president of Anico International Ltd. Nicolas has been representing overseas companies in China for over 20 years and is now representing Chinese companies going overseas.
I asked him to list a number of ways to legally repatriate profits. His reply was that he has done them and could list them, but firms needed to check with someone who could properly advise them before trying to use them.
The list:
Dividends
Dividends should be the main vehicle companies consider to repatriate profits other than royalties and loans. They require a lot of paperwork, but it’s the best way to stay on the right side of the law. Unfortunately, 10 percent of yearly profits must be withheld in an escrow account, as a capital reserve, until it reaches 50 percent of the company’s registered capital (registered capital is the amount of capital required by a company to do business in China. It varies based on type of business and location).
Funds available must be confirmed though tax filings, which need to be filed in the first two weeks following the end of the fiscal year. For example, for 2012, the filing needs to be made in the first two weeks of January 2013. Tax and audit results (your Chinese CPA) must then be submitted to the State Administration for Tax (SAT) for approval. SAT will issue a clearance letter that indicates taxes owed. This allows you to calculate your profit, from which you withhold 10 percent as a reserve (until you reach your 50 percent or registered capital reserve), and the rest is available to be repatriated as dividends.
You will need a resolution of the board of directors, signed by each director and translated into Chinese, authorizing the distribution. This, along with a copy of the annual audit, capital verification report (prepared by your Chinese CPA), annual clearance report, quarterly FEIT (Foreign Enterprise Income Tax) filings, FEIT tax receipts and the banking transaction details for the funds transfer must be submitted to SAT. All papers have to be originals not copies. SAT will then issue an authorization certificate to disperse funds as detailed on the certificate.
Loans
By funding the subsidiary though loans from the parent, you can move money at no cost, but you are limited to interest and principal. For the subsidiary, the interest payments are tax-deductible, while dividends would not be. For the parent company, loan repayments are non-taxable, unlike dividends, which are taxable. Remember terms must be reasonable and justifiable, including any late payment charges.
Royalty payments
Royalties are not considered profit transfers. A parent company can charge its subsidiary royalties for using the parent’s trademarks, copyrights and patents. Remember reasonable and justified.
Transfer pricing
Your company sets up a system of purchase and sale contracts between the subsidiary and the parent company, on terms that favor the parent. Be warned that to be legal, the transfer prices must be reasonable and justifiable. The State Administration for Tax (SAT) regularly updates and reviews transfer pricing terms and schemes due to past abuse of the system.
Irregular payment schemes
By leading or lagging payments between the parent company and the subsidiary, depending on currency exchange fluctuations, you can move profits, but it is more like gambling. You can have penalties for late payments but there is a limit to this type of strategy.
Barter
Barter systems rely on sales of goods between the parent and the subsidiary, where the parent is able to recoup its profits from sales of goods sold to it from its subsidiary. Also, keep in mind the ways that your company can charge for services and be reimbursed for expenses, to determine this consult a knowledgeable expert, as the Chinese government periodically reviews this area.
I repeat, if you intend to employ any of these you need to put clauses describing them in your original company registration documents, submitted to the Ministry of Commerce. You will note, the safe areas are dividends, loans and royalty payments, the others are more complex and open to scrutiny. Some closing advise; this is not an area for happy amateurs, the consequences could be dire if you do it wrong, get some professional advice. n
Einar Tangen, formerly from Milwaukee, now lives and works in Beijing, China. He is an adviser to Heilongjiang Province, Hebei Province QEDTZ, China.org.cn, China International Publishing Group, Beijing Baotong and DGI DESIGN. He is also a weekly public affairs commentator for CCTV News’ Dialogue and the author of “The Kunshan Way,” an economic development history of China’s leading county level city. While in Milwaukee, he was a partner at Jackson, Morgan and Tangen, president of E-Tech and a senior vice president at Stifel Nicolaus. He chaired various boards in Milwaukee and was a member of the Federal Home Loan Bank of Chicago. Readers who would like to submit questions or suggest areas of interest can send an e-mail to steve.jagler@biztimes.com.
