Welcome everyone to another edition of my China Tech Law Newsletter!
Powering through my second month of lockdown here in Shanghai. Let me dedicate most of this post to another story.
A few years ago, I was sitting at the bank, waiting for my number to be called. I had gotten there early. I was in the VIP line. I had all my documents ready to go. More than I could possibly need. I had been burned before by random requests. Bring it all, bring copies of it all. Bring everything you think they could possibly ask even maybe, 0.01% chance, no why would they need that, 0.001% chance? My HSK Chinese language test score from 20 years ago? Bring it, just bring it. That’s how we roll here working with Chinese banks or any government agency.
But over the years, I started getting a bit overconfident about how to minimize the huge time sink this process was. A bit greedy, having my cake and eating it too. Oh they tried to throw a wrench in my plans this time. Only one teller window was open instead of two, usually a death wish because those are the times that the old lady or the big boss’ assistant in front of you has a REALLY complicated transaction or multiple transactions to do and you have no option but to suck it up and wait until they are done. Even in the VIP line. But again, I was a veteran, this was a Monday. I knew they had only one teller on Mondays. I had planned my time accordingly. I had told my friend I was going to the bank to exchange money, he told me to bring a couple books to read.
When my number was called, I looked down at my watch and a huge smile came across my face. Not because of that weird, false sense of pride like when your name is called at the doctor’s office, as if you’re special and you’ve been chosen. No I was smiling because this time my aggressive time management planning was working and my timing was truly impeccable.
As a long-time patron of the bank in question, I knew what was in store when I sat down in front of that teller window. An HOUR of paperwork processing as I sat there, handing tax records, employment contracts, employer reference letter, work permit, residence permit, payroll records, identification information, etc., with document after document being chopped, my PIN being inputted on 10 separate occasions. I asked if she wanted to see my 20 year old HSK test scores. She gave me a funny look.
What was I doing? I was trying to transfer money out of China.
Why the smile for the timing? Because knowing the process takes an hour of just sitting there at a teller’s window, I had scheduled a conference call for precisely the time I thought I’d be sitting down at the teller’s booth and BOOM, nailed it.
For all you multi-tasking fanatics out there, I know what you’re saying right now, “Oh no you didn’t.” Yes, I did. I took a whole 50 minute conference call start to finish sitting at a bank teller’s window, applying to take money out of China.
Okay, so what’s the big deal with getting money out of China? Well for starters, the Chinese currency, the Yuan (CNY) or the Renminbi (RMB) as it is also known is not freely convertible. This fact rears its ugly head across all kinds of work we do here from cross-border investments to supply agreements, even ESOP plans.
There is no open forex market here where you can swap currency, say RMB --> USD. Instead, the process is controlled by the omnipresent regulator, the State Administration of Foreign Exchange (SAFE) and the local banks which implement its policies on the ground level.
These controls are in place for both individuals and companies. For individuals, everyone is allowed a quota of US$50,000 to remit out once per year but that quota has become increasingly difficult to use over the years both for foreigners and local Chinese nationals. Foreigners are allowed to take out money beyond that $50,000 up to the amount of income they have earned in China and have records to show they have paid taxes in full on that income here. That’s the most time-consuming thing the teller was checking for an hour at the bank.
For companies, there is no quota, and the only way to get money out is to remit profits or to be paying a legitimate business expense to an out-of-the country vendor. The options are:
(1) Declare a dividend to your parent company outside of China
(2) Give a loan to your parent company
(3) Pay a service/royalty fee to your parent company
Dividends
- You are allowed to make a dividend payment once per year
- You need an external audit report and an official tax clearance
- Your registered capital must already be fully paid in
- There will be a 5-10% withholding tax on the amounts you take out
- The process will take you on average about 3 weeks
Loan
- Can only be 30% of the registered capital
- Most importantly, the loan has to actually be repaid so it defeats the point as you’ll have to bring the money back anyway
Royalties/Service Fees
- You have to have arm’s length terms for real services or licensed IP - you can’t (in theory) just make up a transaction in order to get money out (although many companies push the envelope here on this front)
- A VAT of 6% is due, depending on where the service is provided, along with a 10% withholding tax (may be reduced under certain China-country tax treaties).
- If the local Chinese subsidiary is a VAT general taxpayer (likely), then the VAT it withholds for the overseas parent company can be used to reduce its own VAT, and royalties paid may be offset before corporate income tax if this expense is deductible. Perversely then, a royalty payment or service fee may actually be more tax-efficient than a dividend payment in the grand scheme of things. Go figure.
- No limit on timing/number of times you can do this
A side note about withholding tax. Its quite common for a local China subsidiary to have a Hong Kong or Singapore parent company, to among other things, take advantage of reduced withholding tax rates when taking money out of China.
For example, Hong Kong has a tax treaty with mainland China which reduces the taxes owed for many categories from 10% to 5%. Singapore, offers similar benefits on most of the same categories. For many years, an intermediate Hong Kong holding company was put in between the ultimate foreign parent company and the local China subsidiary to take advantage of this reduced withholding tax, although these days tax authorities are taking a more aggressive approach to see whether in fact the Hong Kong company has any actual headcount or operations.
Many clients starting a new China venture ask about setting up the Singapore or Hong Kong company from the beginning. For early stage businesses which will not be looking to take money out anytime soon, I often advise to defer until later to decide on incurring that extra step and expense. It can be put in place then.
Back to the issue of taking money out. On balance, with the right preparation (if for example you are having to do a full local audit anyway) a dividend payment can be made if money is not needed urgently and you are dealing with amounts to make the process worth it. A royalty payment or service fee can be made if you have IP you can license in or technical support you provide with a straight face. For example, technology which may or may not be patented, global brand trademarks (you’ll want to get those registered locally btw), etc.
So where does this lead us? Well, taking money out of China is not for the faint of heart. It requires planning and patience. But its also quite doable. And if you can multitask like me, more power to you.
OK, thanks for reading another edition of the China Tech Law Newsletter. A lot of friends outside of China have reached out and asked how we are doing here in Shanghai under this continued lockdown. We are hanging in here. I appreciate everyone asking, and at the same time I know we have been lucky to live here with minimal COVID cases the last 2 years when family and friends of mine trying to manage WFH and other things were having a more difficult time.
*This blog may be considered attorney advertising. It is for informational purposes only and does not constitute legal advice.