Distribution of Dividends from China
The distribution of dividends is the preferable option for remitting profits from a subsidiary registered in China to the foreign parent company; however, there are some conditions the local company must first fulfill:
The company’s registered capital must have been injected according to the time decided in the company’s Article of Association.
The boards of directors must draft a profit distribution plan defining how much profit will be remitted and the timing of payment for the approval of the shareholders.
The annual external audit report and tax compliance process must have been completed and the Company Income Tax (CIT) on the gross profit must have been paid. The distribution of dividends can be done after the annual tax declaration and intra-year dividends cannot be distributed during the same tax year.
The losses of the previous years must have been recovered and this is possible only after the annual tax declaration. It is important to know that in China the loss of a tax year is deductible from corporate income before tax and can be made up within a limited period of five years. Article 167 of the Chinese Company Law, last amended in 2018, defines the procedure as follow:
When distributing the annual after-tax profits, a company shall allocate 10% of its profits for the statutory surplus fund, till reaching 50% of its registered capital. Where the statutory surplus fund of a company is insufficient to make up the company’s losses of the previous year, the company shall, first of all, apply its annual profits to making up its losses prior to allocation for the statutory surplus. After allocating after-tax profits for the surplus fund, a company may, upon resolution adopted by the shareholders assembly or the shareholders general assembly, allocate after- tax profits for its discretionary surplus fund.
A withholding CIT must also be deducted from the dividends before repatriation. The standard withholding tax rate is 10%, but in case of a double tax agreement between the investor country and China, a different rate may be applied.
A special audit report on the value of distributable dividends is often requested and the documents required by the bank for the remittance of a dividend are listed below:
Application form for profit remittance;
Board resolution on profit distribution;
Financial audit reports with paid-in capital;
Annual audit report;
Special audit report on dividends;
Tax record-filing form.