Companies in China are taxed according to the Enterprise Income Tax Law that applies both to local and foreign-owned enterprises in China. Foreign companies in China are taxed on their Chinese-source income and there is a withholding tax for dividends, royalties, and interests. Companies that want to repatriate dividends from China need to observe the Chinese rules for foreign exchange control. More details in this sense can be provided by our team of attorneys in China.
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Taxation on dividends in China
In China, the withholding tax for dividends is 10%, the same as for interest and royalties. The withholding tax on dividends paid to a non-resident company was introduced in 2008. A few years ago there was no withholding tax on dividends and investors in China should know that dividends paid out of pre-2008 earnings continue to be exempt from this withholding tax.
The 10% withholding tax for dividends can be reduced under a tax treaty signed between China and the country of residence of the company paying the dividends. The 10% withholding tax was reduced from a 20% statutory rate.
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Repatriation of dividends from China
The most common manner in which foreign companies based in China can repatriate profits is to pay dividends directly to the parent company abroad. This repatriation of profits from Chinese subsidiaries is however subject to taxation, the most notable being the withholding tax of 10% on dividends. Companies in China can only repatriate profit that has undergone an annual audit and a foreign-invested enterprise in China can only distribute dividends out of its accumulated profits. Our attorneys in China can help you calculate the taxes applicable to companies that want to distribute dividends to a foreign company. If a double tax avoidance agreement is signed between China and the country of residence of the foreign parent company to which the dividends payments are made, then the parent company can qualify as a beneficial owner and can benefit from a preferential withholding tax on dividends. Our Chinese lawyers can help you with more information about taxation for companies in China such as the corporate tax. Other taxes on companies in China include:
– the real property tax,
– social security,
– the deed tax.
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What is the dividend distribution policy in China?
According to the Company Law in China, the board of managers of a firm with establishments in this country is directly responsible for the distribution of dividend payments. In this matter, a dividend distribution plan is normally created, discussed and then agreed by the company members in a meeting board. The implementation of the plans of the profit distribution is normally made within two months if the resolution is signed by the general meeting. It is good to know that the profit dividend distribution policy can be modified only in special cases like external changes or extraordinary circumstances if the board of managers agrees in this direction. It is important to have a Chinese attorney by your side and ask for legal advice in order to understand better the dividend distribution policy in China.
The distribution of dividends for WFOEs in China
Wholly Foreign-Owned Enterprises in China are subject to specific regulations regarding the distribution of dividends. Here are the main rules to consider for dividends distribution:
- • The tax on dividends is imposed after a preliminary audit on the company’s accounts.
- • The board of directors of a WFOE is in charge of proposing the payment of dividends.
- • The next step is to report the dividend distribution to the Chinese tax authorities in order to pay the withholding tax.
- • Apply with the bank for dividends remittance in order for the financial institution to notify the State Administration of Foreign Exchange in China.
The taxation of dividends in China is not subject to harsh formalities, however, it is important to have in mind the experience of some legal advisors in this field. Our team of lawyers in China is at your service if you would like to know more about the taxation on dividends in this country.
The SAT rules in China
The State Administration of Taxation or the SAT in China as it is known was in charge of revising a few regulations related to the double taxation treaties signed by China with the purpose of avoiding the abuse of treaty advantages by taxpayers registered in this country. In this sense, the beneficial owners are the companies incorporated in China, any person having complete control in the firm and over the profits. Trading, management activities and manufacturing companies with establishments in China are considered taxpayers and are protected by the provisions of the double taxation treaties signed by China with countries worldwide.
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Dividends and qualified direct reinvestments in China
Deferral treatments are applicable to foreign investors who decide to directly reinvest their dividend incomes in China, as follows:
- • Foreigners can open new companies in China (WFOEs are recommended).
- • Upsurge or convert to paid-in-capital or investment replacement of local resident companies in China.
- • The purchase of equities in local companies in China.
- • Other types of investments as long as they are developed in agreement with the applicable laws.
Foreigners can reinvest the dividend incomes in sectors like manufacturing, import, and export, tourism, IT and telecommunication, but not limited to these. Listed industries are provided by the Guidance of Foreign Investment Industries in China which is updated on a yearly basis. Let our team of lawyers in China tell you more about the applicable legislation when starting a business in China.
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If an investor from overseas placed his/her direct reinvestments that enjoyed the withholding income tax deferral, either through share repurchase, equity transfer, selling out or other methods, the postponed withholding income tax can be paid within seven days after the foreign investor’s receipt of revenue from the clearance. A foreign entrepreneur might benefit from an exception and continue to enjoy the tax deferral action if the disposal of the reinvestment is part of a reformation transaction that qualifies for special tax deferral treatment accessible for corporate reorganization. It is important to know the tax regime in China before running a business in this country as an overseas investor, mentioning that tax advantages can be obtained for companies registered in special economic zones in China like Shanghai, Zhuhai, Shantou, or Xiamen. Complete legal advice about the dividend tax, corporate tax, VAT, and other important taxes can be offered by our specialized team of lawyers in China. You should also know that an accounting firm in China is at your service if you decide on business in China and need support in tax matters.
You can contact our law firm in China for more information about foreign investments in the country or if you want to open a company in China.