When a sourcing project gets to a certain size, it often makes sense to set up a permanent presence on-the-ground in China to help manage the supply chain. This series of blog posts covers some of the key areas of consideration when it comes to setting up in China.
Foreign investors may repatriate profits from an FIE without restriction subject to compliance with certain procedural requirements, such as prior PRC accounting to determine profits, payment of income tax and obtaining SAFE approval, which is routinely granted.
There is no direct cap on profit repatriation. However, FIEs are required to allocate a certain rate of after-tax profit, determined by the board of directors, to a reserve fund and to an employee bonus and welfare fund. Joint ventures additionally have to make allocations to an enterprise expansion fund.
WFOEs are required to allocate 10% of their after-tax profit to the reserve fund and cannot reduce this rate until the fund reaches an amount equivalent to 50% of the registered capital. Furthermore, profit distribution is not permitted until the WFOE has made up for losses of previous years. There is currently no additional PRC tax levied on distributions of profits to a foreign investor in an FIE.
Written for CSIC by Sophie Mao
China based lawyer at www.AsiaBridgeLaw.com