With capital controls getting stricter, more and more foreign businesses and individuals wonder how to transfer money out of China? Many people are worried that after being in China for a significant time, they won’t be able to repatriate the profits and money they earned doing business here. Also, companies will increasingly have to think about that fact before coming to China.
Money transfers in and out of China are controlled by the State Administration of Foreign Exchange (SAFE). Their main function is to implement relevant laws, regulations etc. in order to ensure that the balance of payments is in equilibrium. The SAFE is also in charge of ensuring that foreign exchanges are compliant with the law and is responsible for meting out punitive actions if that is not the case.
Transferring Money Outside of China as an Individual
Unlike the Dollar or the Euro, the Chinese currency Renminbi cannot be transferred directly. It has to be exchanged into the foreign currency first. There are limits on how much can be exchanged per day. Whereas Chinese individuals can only exchange and thus transfer USD 50,000 per year outside of China (up to USD 2,000 per day, but not exceeding USD 50,000 a year), those regulations do not exist for expats. The process of getting money overseas, however, is complicated for expats as well. There are several options to transfer money outside of China, which will be described below.
The first option is a money transfer with a local bank. First, it is necessary to file an application to the SAFE, which needs to be done through the local bank. The bank will also provide the application form that needs to be filled out properly. Certain documents are required, i.e. passport, or other current identification documents, the work permit, the employment contract, payroll and tax bills. An individual thus has to prove two things: 1) the expat has to be employed properly with a working permit. That means people working on a business visa or a touristic visa will not be able to legally transfer money this way. Secondly, they have to prove that they paid taxes on the amount they are about to transfer.
Once all the documents are handed in and the application form is filled out, the bank will on the individual’s behalf make an application to SAFE. Provided that they do not find any irregularities the funds will be released and the transfer will be processed. Unfortunately, for that process, several commissions are being charged, like a commission fee and a telegraph fee. The bank receiving the transfer sometimes also charges a commission fee. Since the money is transferred overseas in another country with another currency, there will be an exchange fee as well.
If for some reasons the SAFE requirements cannot be met and there is no SAFE approval, the bank will not allow an exchange of RMB and, therefore, no overseas transfer of more than the equivalent of 500 USD per day for foreign individuals (USD 2,000 for Chinese individuals) will be granted. However, if the individual is legally working and living in China and the SAFE requirements are not met, the individual should discuss that with his or her employer and, if needed, get legal assistance.
Another way of transferring money overseas is via specialized companies, which are entitled to do so. The most famous ones are Western Union and Money Gram. Western Union works together with a lot of Chinese banks and is usually faster than an interbank transfer. Additionally, thanks to the “Money Transfer Control Number” the money can be tracked. The commission fee for a transfer with Western Union will be between USD 15 and USD 30. But somebody in the receiving country has to be there and pick up the money. And Western Union will only accept USD, no RMB. Only 500 USD can be transferred at once because only USD 500 (or equivalent currency) can be changed per day. The same applies for Money Gram. If individuals want to transfer more than that they have to prove again that they are legitimately registered in China and all taxes have been paid.
Carrying cash across the border
If individuals travel outside China they can also bring RMB 20,000 in cash without declaring the amount to customs. It is also possible to bring USD 5,000 or the equivalent in any other currency with you. Of course, when traveling with several people, it is possible to bring a bigger sum of money abroad. Nevertheless, when bringing big sums of money outside of China, the only legal way is to transfer the money, but only if properly registered in China.
Capital and Dividend Repatriation
But what about companies which want to repatriate their profits? Companies, too, have to consider the fact that transferring money overseas might not be as easy as it is in other countries. This has to be taken into consideration before setting up the company because when bringing in an amount of registered capital which is too low, there is a risk that the company might have to apply for a loan later. According to the Company Law of 2014, there is no minimum capital which the company has to inject. But as the registered capital will be the company’s main source of funding, it is advisable to do a cash flow forecast for the proposed foreign-invested company in order to find out how much is needed before the company is cash independent or reaches the break-even point. But injecting too much capital in China seems to be a risk as well because investors are afraid that it will be difficult to get the money back to their home countries. The same question arises for dividends and profits. At the moment there is a big uncertainty regarding repatriations from China.
The process of repatriating dividends is the following: Once the company has identified the gross profit, it has to pay 25 % CIT for that amount. From the remaining amount, 10 % has to be paid to the reserve fund. What is left is the amount that can theoretically be paid as dividends, but when paid to an overseas account, there will be a withholding tax charged for this amount. The amount of the withholding tax depends on the existence and the amount stipulated in the double tax treaty.
(1) Repatriations to the parent company in the home country can only be submitted after the annual audit. This way the authorities can control that 25 % CIT (Corporate Income Tax) has been paid on the gross profit of that year. Also, dividends can only be paid for accumulated profits, meaning that they have to be offset with accumulated losses from this year or previous years.
(2) 10 % of the profit has to be paid to a so-called reserve fund account until 50 % of the registered capital consists of reserves.
(3) On profits or dividends, there is a withholding tax levied when they are repatriated to a legal person or entities who are not resident taxpayers in China. The rates of the withholding tax depend on the double taxation treaty with each country but are somewhere in between 0 and 20 %. In order to enjoy the benefits of the taxation treaties, the non-resident company needs to file an application to the tax authority bringing the following documents (the authorities might ask for other documents, too):
- Application form for the Approving Tax Treaty Treatment
- Form of Identity Information
- Letter of authorization which must be issued by the headquarter
- Account statement of the beneficial owner
- Form for filing record
- Evidence for dividends (e.g. contract, agreement, board resolution)
One thing to consider for German companies in China: There is a double taxation agreement between the two countries. However, in the English version of Art. 32 Paragraph 2 (a) it says the agreement shall be effective for “taxes withheld at source, in respect of amounts paid on or after the first day of January of the calendar year next following that in which the Agreement enters into force”, whereas the Chinese version uses the word “obtained” or “generated”. That means that, even though the English version is the prevailing one, there could be misunderstandings and the Chinese tax authorities might even insist on using the Chinese wording. When repatriating dividends, companies should pay attention to this paragraph because according to the English version the double tax treaty applies on taxes for dividends paid on or after 1 January 2017, the Chinese version, however, is valid for taxes on dividends based on profits generated on or after 1 January 2017. However, the date of issuing the dividend might be stipulated by a new shareholder resolution signed after the above-mentioned date. Thus, the dividend would be legally ‚obtained‘ after the 1 January 2017.
The SAFE is also regulating and controlling the foreign money transfers submitted by companies. For transfers of more than USD 50,000, the company is obliged to carry out a record filing to the local offices of the State Administration of Taxation (SAT). Following this regulation, companies only need to fill out a form and provide valid contracts or other relevant transactions documents. According to the “Guidelines for the Administration of Foreign Exchange under Service Trade” and its detailed implementation regulations (Huifa  No. 30), these documents include the annual financial audit report issued by a certified public accounting firm, a board resolution on profit distribution and the most recent capital verification report (or a FDI Capital Confirmation Registration Form) of the applicant. The verification of the documents and tax assessments can take up to 15 days. After receiving the bank’s approval, the money can be transferred directly to the foreign country at the daily conversion rate. The total timeframe for the whole process used to be a minimum of six weeks, but could be longer if DTA benefits need to be claimed.
It is important to note that the announcement does not change the tax obligation. Instead, it just simplifies the outbound procedure. Individuals and companies who do not fulfill their tax obligations or couldn’t meet the filing and registration requirements can be charged with fines ranging from 50 percent to 500 percent of the unpaid tax payable.
Grace Shi is a partner at ECOVIS Beijing China. She has over 12 years of experience in accounting, auditing, and tax advisory services in both international accounting firms and large Chinese corporations. She has an international MBA and a US Global Finance Master’s degree. Since 2001, she is a Chinese Certified Public Accountant (CPA) and, since 2002, a Chinese Certified Taxation Agent (CTA). Mrs. Shi is one of the founders of ECOVIS R&G Consulting Ltd. (Beijing). She has perfect skills in written and spoken English and Chinese. For more information, please contact: email@example.com
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