Preparing for declaration of dividends in China
[ By Adam Livermore, Senior Associate, Dezan Shira & Associates Dalian office ]
As we have already explained, the accounting year runs from January to December in China, so now is a very good time to start planning for declaring dividends for repatriation and/or re-investment of profits.
Your decision here will depend upon instructions from your parent company overseas, however there are a number of tax-related factors to bear in mind. This article first introduces the procedure that must be followed when declaring dividends and the extra steps necessary if funds are to be reinvested. It also covers the incentives available to investors either re-investing funds into their existing Chinese entity or another operation in the country.
Repatriation of profits from China is of course preferable if your organisation requires the funds for re-investment abroad, or to return to the shareholders.
The process for declaring dividends and repatriating funds
- First of all the amount of funds available must be confirmed. The fourth quarter’s Foreign Enterprise Income Tax filing for 2006 will need to be made in the first two weeks of January 2007 (China having a calendar fiscal year), and after this an annual audit must be carried out. (explained elsewhere in this month’s China Briefing). The annual clearance process reflects the results of the audit on the accounts, and this is submitted to SAT for approval.
- Assuming there are no problems with the submitted documents, SAT will issue a tax receipt confirming the final amount of FEIT payable.
- With this figure defined, the profits tax payment for 2006 can be completed and the net profit figure derived.
- Not all profit can be repatriated or reinvested. A portion of the profit (which must be at least 10% for WFOEs) must be placed in a fund reserve account. This is treated as part of owner’s equity on the balance sheet. This account is capped when the amount of reserves equals 50% of the registered capital of the company. In addition the investor may choose to allocate some of the remainder to a staff bonus/welfare fund or a development fund, although these are not mandatory for Wholly Foreign Owned Enterprises.
- The remaining balance is available for redistribution. Firstly, a resolution of the Board of Directors to authorise such redistribution must be signed by each director, and translated into Chinese.
- Then an application form supported by the following documents (all in Chinese) must be submitted to SAT :
- annual audit
- capital verification report
- annual clearance report
- quarterly FEIT filings
- tax receipts proving FEIT payments have been made in full
- bank and general details of the Chinese entity and entities receiving funds
- SAT will review all these documents to check that everything is legitimate and issue an Evidence of FEIT Payment certificate.
- This certificate authorises the bank to disperse funds as detailed on the certificate.
Some of these documents need to be provided by your licensed CPA firm in China (such as the capital verification report) and as the documentation can be awkward to manage for businesses overseas it is usually part of the role of the company's accountants to assist with the repatriation process and ensure transparency at all stages in the transaction. There have been cases of company employees arranging to have profits distributed elsewhere and then disappearing.
To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
