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China Focus – December 2016

Profit Repatriation for Foreign Invested Enterprises in China

China has a highly regulated system of foreign exchange controls, and a common concern for companies operating here revolves around the question of profit repatriation. China allows Foreign Invested Enterprises (FIEs) to repatriate their profits out of the country and it is important to understand the various mechanisms for doing so in order to most efficiently access your China-sourced profits. This article will outline the main methods of repatriation and highlight some of the requirements that need to be satisfied in order to remit these sums out of the country.

The State Administration of Foreign Exchange (SAFE) is the government bureau tasked with controlling capital flows into and out of China. Flows are strictly controlled and FIEs should be careful to avoid raising any red flags with the authorities. The following three items will raise red flags and may hinder a company’s ability to remit their profits abroad:

  • Profits that are not in line with industry standards
  • Dealings with companies in tax havens
  • Failure to complete all required documentation

Common accepted ways to repatriate profits are:

Dividends:
Dividends can only be repatriated once a year and only after the preparation of all annual tax reports. Additionally, any losses carried forward must be settled before dividends can be repatriated. Companies must make a contribution to the capital fund (10% of annual profits for Wholly Foreign Owned Enterprises) and the reserve fund must be at least 50% of the registered capital before dividends can be repatriated. An annual tax clearance and audit report must also be submitted before sums can be repatriated. China applies a 5-10% tax on dividends sent overseas, although the existence of Double Taxation Agreements (DTAs) with some countries can reduce this.

Service fees & royalties:
A company can charge another company for the use of royalties. Royalties refers to the use of items such as copyright, trademarks and patents. Such payments would be subject to 10% withholding tax and 6% VAT. In these cases companies should be careful to adhere to the “at arm’s length” principle in order to avoid raising transfer pricing concerns.

Loans:
An inter-company loan paid by the China company to its parent is another form of repatriation. A foreign currency loan must be approved by SAFE and the loan amount cannot exceed 30% of the FIEs registered capital. Such loans are subject to 25% Corporate Income Tax (CIT) plus a 5-10% business tax on interest earned.

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When considering the best method to repatriate funds companies should pay attention both to taxes in China and the receiving country. Sovereign may be able to help you determine the best strategy for your particular circumstances.

 

China’s E-commerce Platforms: Same same but different?

Sovereign recently organized an e-commerce seminar covering a number of topics including the ecosystem and how companies can succeed in the largest and most competitive market in the world. Surprisingly, we received many questions about the differences in the various e-commerce platforms. For example, many in the audience thought that Tmall and Taobao were the same. Yes, both are owned by Alibaba group, but they are distinctly different platforms. Therefore, we would like to take some time to clarify the differences between some of the key e-commerce platforms in China:

Business-2-Business-2-Consumer Model – the online Wal-mart:

Imagine you are a Spanish wine producer and want to sell your products to French consumers. However, you don’t want to be too involved in the details of marketing and promotions, or distribution. So, you identify a company, (Carrefour or Wal-mart), that will buy your goods directly and then re-sell them to consumers. Effectively, you are selling directly to the reseller.

In the online hypermarket model, brands sell directly to platforms such as JD.com or Amazon, which then resells them. If you have shopped on Amazon.com before, you may notice that many of the products are fulfilled by Amazon. In these instances, Amazon has either purchased or is holding inventory on consignment and re-selling the products. In many ways, this model is not very different from a traditional distribution model.

Business-2-Consumer Model – THE online shopping mall:

Imagine you are an Italian fashion brand and want to setup a store and sell your products at the Mall of America in the United States. You contact the mall and ask for the retail space rental department. You visit the mall and look at the available locations and agree on the space you would like as well as the rental price. As with any shopping mall, you provide a fixed rental fee for space, as well as a percentage of monthly sales to the mall operator. In return, the mall runs events, and provides aggregate traffic to all of these stores within. However you, or your licenses representative, ultimately run your store.

Now, imagine a mall the size of China – literally – with thousands and thousands of shops and hundreds of millions of customers who are online shoppers. The mall is Tmall. Tmall is a platform in which legitimate brands and distributors can setup a shop and sell their goods to consumers. The job of the platform is to help drive traffic and provide support services to the shop, including payment processing.

Consumer-2-Consumer Models – TaoBao, the king of bazaars:

Imagine that you are an Australian living in Sydney and you found a great deal on carved Greenstone from New Zealand. You buy some up and decide to set up a stall down at the local Swap Meet (bazaar) on Sunday’s to sell these amazing products. Of course there is a small fee to setup up but you don’t mind as you’d like to make some extra cash. Of course, the swap meet has many other stalls. Some of the people sell things there as their full time job. Some of them are just there to sell their used things that they don’t want any more. Others are selling homemade crafts, and some are even selling products of questionable authenticity.

Now imaging the same thing, except this time, instead of selling at the local swap meet, you are selling on a website known as Ebay, or if you are in China, the website is called Taobao. These sites have individuals and in some cases business selling goods to consumers. The goods may or may not be real, and they sellers are likely not licensed distributors of the product.

Cross-Border Model – the Hong Kong version:

You are a small artisan honey brand from The Netherlands and you want to sell your products to other countries but don’t have enough resources or sales volume to setup a shop everywhere. You manage to advertise on some international outlets and occasionally you receive orders from overseas. Once you receive the order and payment, you package up your honey and mail it to the customer, an individual located in the United States or wherever else in the world they may be. You don’t get many orders, but it is relatively risk free to advertise and you don’t mind the few extra orders. At this point, you are effectively engaged in cross-border commerce.

A cross-border e-commerce model follows the same general models as those detailed above (e.g. hypermarkets, malls, bazaars, and so on); however, they occur on separate platforms that are setup outside of China’s customs border, and are usually hosted in Hong Kong. Although they are relatively simpler and can be used to test the market, the amount of aggregate traffic is minimal when compared to the domestic platforms. Furthermore, logistics can be challenging and the Chinese government is beginning to add regulatory restrictions on what can be shipped via cross-border logistics.

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Of course these are oversimplified examples of some of the main types of e-commerce platforms that exist. Others exist as well, including peer-to-peer platforms. Before selling in China’s e-commerce market, understanding the platforms, the pros and cons of each, and developing the appropriate strategy is necessary, otherwise you risk failure or worse – damaging the brand. There are a multitude of options for selling on one of China’s e-commerce marketplace platforms. You should spend the time and resources to find out which one is best for you. For more information about China’s e-commerce market, please feel free to contact Sovereign China.


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