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Dividend repatriation is one of the main methods used by overseas shareholders for retrieving funds from Chinese investments, given the jurisdiction’s foreign exchange controls. In this article, we explore some of the key considerations, such as tax types, tax rates related to dividends payment, together with conditions to enjoy preferential tax rates indicated in double taxation agreements, and favorable conditions.
Unlike overseas enterprises that obtain service provision income, interests and royalties from China, dividends obtained by overseas shareholders from China are not subject to value-added tax (VAT), but only to enterprise income tax (EIT).
Beneficial owner conditions apply to overseas enterprises or individuals who intend to enjoy the DTA favored treatment of dividends, interests, royalties, and technology patent income.
Tax treaties signed between China and other countries (regions) provide foreign shareholders with a preferential tax rate of less than 10% of the dividends they receive from China, or even give up every taxation rights. However, requirements for the status of foreign shareholders vary from each country's agreement. Some only apply to foreign corporate shareholders, while others apply to individuals too.
In general, if there is a shareholding ratio requirement in a treaty, it usually refers to the direct shareholding ratio. However, some treaties would accept the total proportion of direct and indirect shareholding and regard it as the conditions being met.
China’s "Enterprise Income Tax Law" stipulates that for the passive income of non-resident enterprises from China, the applicable EIT rate under the Chinese tax law is 10%. However, if the tax rate of dividends, interests and royalties in the tax treaty is higher than 10%, the taxpayer has the right to enjoy the relatively favorable option, i.e. the 10% tax rate under domestic tax law.
It’s subject to the requirements of the treaty. For example, the China-Singapore tax treaty and the China-Belgium tax treaty stipulate that the proportion of equity in the invested enterprise must be above 25% at any time within 12 months before the dividend is received in order to enjoy the preferential tax rate.
Foreign investors need to pay EIT when converting undistributed profits into share capital. Meanwhile, the conversion of undistributed profits to share capital will increase the paid-in capital for the invested enterprises, resulting in stamp duty.
Under the PRC Company Law, a Chinese entity needs to fulfil the following procedures before distributing their profit as dividends:
1. Calculate the profit available for distribution
2. Legal Reserve Accrual
When a company distributes its after-tax profits of the current year, it shall exclude 10% of the profits as the company's legal reserve prescribed by law. The company may stop drawing the profits if the aggregate balance of the legal reserve has already accounted for over 50% of the company's registered capital.
3. Make up for the previous year’s losses
If the aggregate balance of the company's legal reserve is not enough to make up for the losses of the company of the previous year, the current year's profits shall first be used for making up the losses, before the legal reserve is drawn.
4. Draw a discretionary legal reserve via a board resolution
After the company has drawn statutory legal reserve from the after-tax profits, it may, upon a board resolution, draw a discretionary legal reserve from the after-tax profits.
5. Dividend distribution
Dividends can be divided into several payments. The designated bank will examine and verify the overseas payment’s purpose and whether relevant taxes have been paid.
Hawksford is an established, international service provider of company registration and outsourced corporate services in Asia. We have more than ten years’ experience in providing corporate accounting and taxation solutions. With five offices located in China, our skilled team of experts has extensive experience in assisting multinational clients to deal with corporate tax compliance in China. We provide our clients with reasonable and effective solutions in dividends payment with the aim of achieving tax balance and meeting the local regulations.
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