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Getting Money Out Of China. Do NOT Try This At Home.

Posted in China Business, Legal News

I love our China Law Blog Linkedin Group.  Love it.

Most of the time.

It’s a great way for those interested in China law and China business issues to converse with each other and to learn from each other.  We have countless great discussions every week. Commonly, people ask great questions and get great answers.  Legal questions get asked and answered.  Mostly correctly.  I almost never weigh in as I do not see it as my role.

But the other day I couldn’t resist.

Let me explain.

A group member posed the following question:

Any tips on repatriating inter-company loans or profits out of China?

Wondering if anyone can provide insight or point me in a direction for information on how to repatriate money back to the home country. I understand that dividends are an option but are subject to tax from China as well as the home country. How about loaning money back or other inter-company charges or transfers?

I winced.  I winced because I knew what would be coming and I knew I would not like it. I winced because I know that this is an incredibly complicated question and I know that there are all sorts of “home remedies” for this that can be worse than the bite itself.  I winced because the best answer to questions regarding getting money out of China is probably going to be that it cannot be answered at all in a general way and that the only smart way to answer is to tell the questionnaire to consult with a China accountant, a China tax specialist, or a China tax lawyer.  But nobody wants to hear that.  So I said nothing.

But the answers started pouring in and they caused me to wince even more. Especially after the person who posed the question clarified that what he needed help with was figuring out how to repatriate China WFOE profits back to the parent company overseas.  Someone made the following suggestion:

Suppose the parent company provide service to the WOFE….

Then another someone confirmed this as a potentially good way to go:

Royalties or technical service fees charged to the China operating company might be another option.

Then the person who originally posed the question hinted that his company might do as advised above:

Thanks for the suggestions. The service or royalty fees approach is an interesting concept.

I could no longer take it and I just had to chime in, and I did, with the following:

It may be interesting, but it’s also incredibly complicated and could be disastrous. First off, the tax on services and royalties (especially royalties) can be very high. So your doing this could cost you up to 42% of whatever funds leave the country. You also will need to document this entirely correctly or the funds might never leave. See Service Companies In China. How To Get Paid. for more on this. And, even worse, the Chinese tax authorities could argue that your US company, by performing whatever services it performed, has become permanently established in China, and then you will need to deal with that. Honestly, if I were you, I would retain a really good international accountant because if you don’t you could find that your machinations will cost you way more than any amount you are trying to save. This stuff is not for lay-people.

At which point, Matthew McKee, a tried and true tax lawyer previously based in China added the following great advice:

Kevin, this can be a very complex issue and usually involves an interaction between Chinese tax laws, the tax laws of the company in which the parent is resident (and sometimes the country in which the controlling shareholder(s) of the parent company is resident). I agree with Dan and would recommend that you speak with an accounting firm that can provide advice on Chinese tax law and the tax laws of the country in which the parent company is resident.

The attractiveness of royalties and services fee options ultimately depends upon the location of the parent and the circumstances. Service fees can attract business tax (which has recently been incorporated into the VAT system) which may negate any benefit in avoiding withholding tax on the dividends. This can work out worse as many countries provide a tax offset for foreign income tax paid. This would apply to the withholding tax on dividends but not to business tax.

When looking at tax issues on international transactions it is imperative to look at the outcome from the application of the tax laws of all countries involved and not simply China.


What do you think?

  • lacompacida

    You mean there are actually people set up business in China without knowing how to get their profits out before hand ?

  • Paul Van Allen

    Dan, if intellectual property is held in the US and a product is manufactured and sold in China how can the Chinese company pay the US company for the IP rights? Should this follow the same advice as you have here: Service Companies In China. How To Get Paid?