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As the 2011 fiscal year draws to a close, foreign investors and executives will be turning their attention to profit allocation. Whether you seek preferential tax rates or to remit dividends abroad, you need to be aware of both the specific tax implications and the increasingly restrictive approach by Chinese authorities.

Withholding Tax  – The Last Tax for Shareholders

Since the 2008 Enterprise Income Tax Law came into effect, China now imposes Dividend Withholding Tax (WHT) on earnings repatriated to overseas shareholders. Currently, foreign companies and individual shareholders fall under different Dividend WHT policies.

China’s taxation law stipulates a ten per cent dividend WHT for foreign shareholders. However, a lower rate may apply with countries and regions that have bilateral tax treaties with Mainland China. For example, both Mainland China-Hong Kong and China-Singapore agreements reduce the Dividend WHT rate to five per cent, whereas the same tax is ten per cent between UK and China.
The new laws have made it more difficult for taxpayers to apply for preferential tax rates that treaties once guaranteed; now these same rates require a series of applications and approvals. Before dividends can be remitted to overseas shareholders, the Chinese company’s shareholder general meeting must approve profit distribution, and tax authorities need relevant documents to verify qualification for bilateral tax treaties.
Financial personnel should arrange payment of the Dividend WHT directly after the shareholder resolution, not the dividend’s repatriation, which tax authorities will see as a delay.

Dividend Planning

In November 2008, the State Foreign Exchange Administration and the Tax Administration issued a collaborative regulation that has increased control over remittance amounts. Overseas remittance dividends of over US$30,000 require a tax payment certificate from the local and the state tax bureaus, while tax exemption remittances still need a tax exemption certificate. Amounts equal to or under US$30,000 do not require tax payment certificates, but this does not mean you are exempted from WHT.

Another key point is that overseas shareholders receiving dividends under the bilateral tax treaty should be tax residents in that country. With increasingly strict tax regulations, offshore holding companies should prepare proof of tax resident status in the host country.

Reinvesting Profits

Given the robust Chinese market, many foreign investors would rather keep their profits within China and capitalise on other investment opportunities. Whether you choose to re-invest your earnings in another Chinese enterprise or increase the registered capital of your own company, you will face a ten per cent withholding tax. Moreover, tax rebate regulations regarding profit reinvestment have been cancelled since 2008. However, using your profits either to fuel growth and expansion or to invest in another Chinese company through your existing company in China will not involve any withholding tax issues.  

THIS COLUMN IS SPONSORED BY CPL CONSULTING

CPL Consulting provided auditing services for CBBC China for the financial year 2010-2011. For more information, contact Queena Ye at Queena.ye@cplchina.biz, +86 (10) 6591 6000 602

 

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