One of the questions we’re most often asked by western business people considering expanding into Asia is: how would we go about getting money out of China?
This can be quite a complex matter, with obstacles to overcome and rules that frequently change. But, for most businesses, it’s far from insurmountable if you know what to do. And given the size and growth rate of the Chinese economy, the complications are rarely a good reason to avoid targeting the market.
While we’ve always been often-asked how to get money out of China, it’s a matter that’s been particularly vexing western businesses since new foreign exchange controls were introduced in July 2017.
Under the new rules, Chinese banks and other financial institutions have to report all cash transactions worth over RMB 50,000 (equivalent to USD$7,200 or £5,600), as well as individuals’ overseas transfers worth USD$10,000 or more.
When it comes to businesses, the State Administration of Foreign Exchange (SAFE) vets the authenticity and legality of any company's outward direct investment (ODI) plans which involve transferring more than USD$50 million out of China.
But, as with most systems of rules, it’s largely a matter of knowing your way around.
Three main scenarios
People are typically considering one of three main situations when they ask about getting money out of China — with different hurdles and solutions for each.
1. Getting paid for exports by a Chinese customer
This shouldn’t pose a problem as long as you address the following factors:
- Make sure that, as a matter of course, you have robust sales contracts in place to submit to the local foreign exchange regulator.
- Be aware there may be withholding taxes, particularly if the payment relates to license fees, royalties or know-how. Typical withholding tax on royalties is 10% and remittance of patent royalties must be accompanied by a receipt from China’s State Intellectual Property Office. Make sure your prices are net of all relevant charges such as withholding, business and concessionary taxes. This means that, if the price to your customer is $100, you’ll receive $100 – not $100 less taxes! There may be a learning curve for your customers’ purchasing departments, but they’ll get their heads around it eventually.
- Vitally, make sure up-front that your Chinese customer — whether they’re an end-user or a distributor — is willing and able to bear the administrative burden of submitting the application to transfer funds overseas and to pre-pay the sales tax. Taxes differ depending on the type of transaction but, in all cases, these need to be pre-paid by your customer before they’ll be permitted to wire foreign currency overseas. That’s another reason why it’s important you stipulate that your prices are net of all relevant taxes.
2. Repatriating profits from a Chinese subsidiary
This is typically a question of how a western company can take dividends from its subsidiary in China, whether it’s wholly or partially-owned.
Again, there should be no problem in this — although you have to know what you’re doing and the process can be laborious.
The main steps are to:
- Ensure you have a legally-registered WFOE (Wholly Foreign-Owned Enterprise) in China, operating strictly within its registered scope.
- Make sure your subsidiary allocates 10% of its profits after taxes to a reserve fund until the fund reaches 50% of the registered capital.
- Be aware that dividends can only be repatriated once a year after all company annual reports have been published, or in the interim following the publication of financial statements.
- Be ready to pay dividend tax, although this may then be recoverable under a bilateral tax treaty with your company’s home country. Chinese dividend tax ranges from 5% to 15%, depending on the jurisdiction to which the dividend is paid.
It’s worth keeping in mind that, since late 2016, there have been increased delays in the payment of dividends worth over USD$5 million. Banks are reviewing the legally-required documentation more carefully with large sums and, in some cases, submitting the documents to SAFE, dragging out the processing time.
3. Securing a Chinese investor
The typical question here is how to get funding from Chinese investors into a company based outside China.
In navigating the regulatory hurdles, it will benefit you enormously — and may be essential — that you are offering something, such as a technology, that’s strategic to China’s economic growth. That’s to say, it will ideally be something that will help the country fulfil its 13th Five Year Plan or its Made in China 2025 industrial policy. Be ready to articulate clearly how your product or technology supports these strategies.
You should also do your homework to ensure you understand the restrictions placed on your potential Chinese investors.
Ultimately, if securing Chinese investment into your organisation outside China looks difficult, consider the option of establishing a Chinese entity —either wholly-owned or in partnership —into which the investment could be directed.
This can be an excellent solution where China is a significant marketplace or offers a critical supply chain.
Market of importance
Getting money out of China does have its complications, but can almost always be done with some patience and a solid understanding of the rules.
Certainly, if China’s a market of any importance – and there are few companies today with global growth ambitions for which it isn’t — it’s one of many practical details to navigate rather than a factor that should deter you.