Profits Repatriation Structures

Many foreign investors tend to rush the decision to go into China, without considering one of the most important parts of the overall planning, the effective repatriation of profits. Often this is due to the fact that companies do not foresee making a profit in the first two to three years. That said, if no structural changes are made to a standard Articles of Association of the foreign invested entity (FIE), the company may lose out on between 4% to 13% of the total turnover through tax payments.

Therefore, a careful planning and consulting should be considered, before the China entity is established. Here are some examples:

Profits Repatriation Structure for royalties, license fees:

Fees received by a Hong Kong holding company from the China entity are tax free, although they generally attract a withholding tax in China of approximately 10%. However this compares favorably against China’s tax on profits of 15% in Free Trade Zones, Special Economic Zones or other similar zones, 24% if in a municipality and 33% elsewhere. Savings of between 4% and 13% of your total net profit in China can be achieved. That said, these require profit repatriation structures to be built into the Articles of Association of your China entity.

On 1st January 2008 the tax on profits will be readjusted to 25% for all foreign and domestic companies.

Incentives for Re-investing:

If you wish for your profit to remain in China, incentives are available for re-investing your profit. The re-investment must remain in the entity for five years and you can not repatriate the funds. You may receive tax refunds on taxes paid (not applicable if your entity has been granted tax holidays), and can be as much as 40% of the total Foreign Enterprise Income Tax paid. Again, these structures have to be built into the Articles of Association, and need to be approved by the local tax authority, but do not necessarily have to be activated.

Allocating Mandatory Company Funds:

Before your company is due it’s mandatory annual audit, which will be followed by the settlement of taxes, mandatory funds need to be calculated. These can include amounts for enterprise expansion funds, reserve funds, staff and workers welfare and bonus funds, to give examples. These funds need to be specified for WFOE’s by law, and must be more than 10% of after tax profits.

Make transfer pricing agreements clear and at arms length:

In China, Transfer pricing regulations are very complex, but one point they make clear is that fees, pay prices or expenses must be charged at rates similar to those charged between independent companies. If the local tax bureau does not agree that this guideline has been followed, they can re-adjust charges. The best protection against a transfer price investigation is to ensure real administration cost has been identified correctly and agreements have been put in place.