Intra-Annual Dividend Distribution in China
Regarding the intra-annual dividend distribution, it is worth noting that while it may be formally possible to obtain a specialized intra-annual audit certifying earnings generated within a specific period of the year, based on experience, it is standard practice for banks and the regulatory authority (SAFE) to require an audit of dividends generated during the calendar year (January - December). This same procedure may not be recognized at the intra-annual level. The international payment aspect adds complexity to the control and distribution of intra-annual dividends, even though it is not prohibited. Hence, we often recommend considering the distribution of dividends solely within the calendar year, with payments made in multiple tranches for a more feasible implementation.
A company intending to distribute its profits must adhere to the following prerequisites:
The profits should be calculated after all applicable taxes have been deducted.
The profits should be determined after offsetting any accumulated losses from prior years.
The profits should be established after setting aside 10% of earnings as the company's mandatory statutory reserve.
If, contrary to the provisions in the preceding paragraph, profits are distributed by the shareholders' meeting, general meeting of shareholders, or board of directors before the losses are covered and the statutory common reserve is established, such distributed profits must be returned to the company.
Furthermore, in practice, certain banks may require the submission of an annual audit report, particularly when dividends are to be disbursed outside of China.
Related regulation as follows:
Company Law of the People's Republic of China (Amended in 2018)
Article 166 Where a company distributes its after-tax profits for the current financial year, it shall draw 10% of its profits as the company's statutory common reserve, provided that a company with an aggregate common reserve of more than 50% of the company's registered capital may elect not to draw any statutory common reserve any more.
Where the aggregate balance of the company's statutory common reserve is insufficient to cover any loss the company made in the previous financial year, the current financial year's profits shall first be used to cover the loss before any statutory common reserve is drawn therefrom in accordance with the provisions of the preceding paragraph.
Where any company has drawn a statutory common reserve from its after-tax profits, it may, subject to a resolution of the shareholders' meeting or the general meeting of shareholders, draw a discretionary common reserve from its after-tax profits.
Where losses have been covered and the statutory and discretionary common reserves have been drawn, any remaining after-tax profits shall be distributed to shareholders in accordance with Article 34 of the Law in case of a limited liability company or on a pro rata basis in case of a joint stock limited company, unless its articles of association provides distribution shall not be made on a pro rata basis.
Where the shareholders' meeting, general meeting of shareholders or board of directors distributes profits in violation of the provisions of the preceding paragraph before losses are covered and the statutory common reserve is drawn, the profits distributed must be returned to the company.