Getting Your Money Out of China
In this section, we tell you how to get your profits out of China, as well as how to recoup portions of your investment — short of liquidation, of course. (For information on whether you need approval to convert your RMB, see the earlier section called “Switching things up: Accounts for foreign exchange.”)
Sending profits back home
Don’t worry — you can get your profits out of China! Your company is allowed to send dividends (profits) to all foreign shareholders on the current account (see the earlier “Current-item bank accounts” section). First, though, your company’s registered capital (see Chapter 7) must be completely paid in; second, you can remit dividends only after the company has paid all applicable taxes on the profits.
To send out the dividends, you have to give the following documents to the bank:
| ✓ | Your company’s tax payment certificate and tax return; if your company receives any preferential tax treatment (which we discuss later in “Corporate taxes”), you have to also provide supporting documents from your local tax bureau |
| ✓ | An auditor’s report for the current year |
| ✓ | A resolution from the company’s board of directors authorizing the dividends |
| ✓ | The Foreign Exchange Registration Certificate (FERC), which your company receives from the State Administration of Foreign Exchange (SAFE) when you get approval for your general capital account |
| ✓ | The capital verification report (see Chapter 7) |
SAFE may also require other documents on a case-by-case basis. In most instances, the process for remitting dividends is a formality rather than an actual review and approval. However, particularly large remittances (over US$100,000) and other questionable transactions may receive SAFE scrutiny even after the bank approves them.
When your FIE expires or is terminated early, you may remit all money remaining in the company overseas as well.
Unfortunately, you do encounter some limitations in paying dividends:
| ✓ | Your registered capital must be paid in full. |
| ✓ | You can pay dividends only after the business has been audited for the year and paid all its taxes (see “Paying the Government without Taxing Your Patience,” later on). In other words, even if you’ve contributed all the registered capital, you have to wait about a year in between dividends. Your dividends won’t be tax-deductible business expenses. |
| ✓ | You’re not allowed to dividend out more than the company’s net income in any given year. |
Repaying foreign debt
Foreign debt is any debt that a company registered in China is required to repay in foreign currency. Among other items, foreign debt includes loans from a company’s own shareholders (if they must be repaid in foreign currency) and trade credit.
Being able to repay foreign debt is a two-step process:
1. | Register the foreign debt with the State Administration of Foreign Exchange (SAFE). If you don’t register the debt with SAFE, your company may not be able to get approval to exchange RMB to pay it. After you register your company’s foreign debt, you receive a Foreign Debt Registration Certificate (FDRC). |
2. | Apply to SAFE for verification when you want to make a foreign debt payment. To apply for verification, your company submits the FDRC, the loan agreement, and a notice for payment from the creditor. Provided that you’ve registered the debt, SAFE verification is usually routine. In repaying a foreign debt, your company first has to use its existing foreign currency; then it has to get SAFE approval to exchange RMB for any remaining debt amount. |
Some banks handle the SAFE payment verification procedures free of charge. When shopping for banks, discuss whether they’ll handle this process without charging fees.
Prepaying foreign debt (that is, paying before the loan is actually due), presents some special issues. SAFE will likely allow you to prepay only if the loan contract specifically states that you can prepay the debt. You need to make any prepayments using foreign currency you currently hold — SAFE won’t approve conversion of RMB for prepaying a loan. In other words, if you don’t have spare foreign currency, you can’t prepay the loan.
Using other money exit strategies
Fortunately, you have additional ways of getting money out of China. The following sections name some options.
Intellectual property agreements with offshore companies
One common way to get money out of China is for the foreign-invested enterprise (FIE) to sign intellectual property (IP) licensing agreements with offshore companies that are owned by the same shareholders as the FIE.
Trademarks and technology (either patents or know-how) are the types of IP that are commonly licensed.
For example, say you set up an FIE in China and you also set up a company offshore in a nation that has a fully convertible currency. Setting up a trademark license is relatively easy — after your trademark is registered offshore, you register it in China. Your offshore company then licenses IP to the FIE. The FIE can then make regular licensing or royalty payments from its current item account.
Of course, these licensing agreements do have limitations. For one, there must actually be IP. And you need to make sure that no one in China has already registered your trademark. Also, note that some types of IP license agreements — such as technology license agreements — must be registered with governmental authorities so you can remit licensing fees and royalties. Also, the amounts the FIE remits as fees and royalties must make sense to the tax authorities and SAFE. See Chapter 17 for more info on trademarks.
Consulting agreements
Another option for getting money out of China is to sign consulting agreements between the FIE and an offshore company (or yourself). The idea is that your offshore company (or you) is providing valuable consulting and management services to the FIE, even if those services involve only your time.
Shareholder loans to FIE
A common technique for getting money out of China is having a parent company provide a shareholder loan to the FIE, which we discuss later in “Borrowing from offshore.” That way, the FIE must make regular foreign currency loan payments to the lender — its shareholder!