How to Distribute Profits to Overseas Shareholders? — Key Steps and Compliance Guide for Profit Remittance by Foreign-Invested Enterprises

2025-10-18

Introduction

For Foreign-Invested Enterprises (FIEs), legally and compliantly remitting profits earned in China as dividends to overseas shareholders is a crucial operational process. This involves not only the effective distribution of profits but also meeting regulatory requirements in taxation, foreign exchange, and banking operations. Based on our firm's practical experience in cross-border business, this article systematically outlines the entire process—from the profit distribution resolution and tax withholding declarations to cross-border fund remittance—providing a clear and practical operational guide for enterprises.

Phase 1: Internal Decision-Making & Preliminary Preparation

Prerequisites for Profit Distribution

What are "profits"? According to Chinese Accounting Standards, profit refers to the operating results of an enterprise within a certain accounting period. It includes net income after deducting expenses, gains/losses directly included in current profit, etc.
Before distributing profits, an enterprise must ensure it has sufficient accumulated retained earnings (after-tax profit), sound financial health, and adequate cash flow to guarantee that the distribution does not impact normal operations. The profit distribution plan must also comply with relevant laws, regulations, and the company's articles of association.
According to Article 210 of the Company Law of the People's Republic of China (2023 Revision), profits must be distributed in the following statutory order:Offset prior years' losses; Allocate 10% of the profit to the statutory reserve fund (this allocation may cease once the reserve reaches 50% of the registered capital); Distribute the remaining after-tax profit to shareholders. Limited liability companies distribute according to the proportion of capital contribution (unless all shareholders agree otherwise), and joint-stock companies distribute according to shareholding ratio (unless the articles of association stipulate otherwise).

Decision-Making Body and Process for the Profit Distribution Plan

The authority to decide on profit distribution is determined by the company's articles of association.
When applying for cross-border profit remittance, the FIE must provide its articles of association (which specify who has the authority to decide on profit distribution) and a valid distribution resolution signed by that authorized body or person.
This resolution, as the starting point and core document of the process, should clearly state key information such as the total profit distributed, distribution ratios, and amounts due to each shareholder.

Phase 2: Bank Remittance & Document Review

After confirming the profit distribution plan, the enterprise can proceed to communicate with the bank, apply for remittance, and prepare the necessary documents to complete the dividend payment. Commonly required documents for the remittance application include (please confirm specific requirements with your bank):

Financial Statements (generally audited statements are required)
Articles of Association and any amendments
Profit Distribution Resolution
For single payments exceeding USD 50,000 equivalent: Tax Record Filing Form for Outward Payments for Service Trade, etc.and its verification code
Outward Remittance Application Form (standard form provided by the bank)
Other documents required by the bank (which may involve FDI business vouchers, FDI inbound fund records, capital verification reports, shareholding structure charts, Multi-Report Integration filings, etc.)

Sinobravo Observations:

Regarding Multi-Report Integration:

According to the review principles for profit remittance under domestic direct investment in the Foreign Exchange Business Guidelines for Capital Account (2024 Edition)issued by the State Administration of Foreign Exchange (SAFE), banks should verify whether the enterprise has completed the annual Multi-Report Integration filing (i.e., the Industrial and Commercial Annual Report) and check for any anomalies in the declared data.
In practice, if the profits to be remitted involve accumulated retained earnings from multiple years, banks may request annual Multi-Report Integration filings from those previous years during compliance checks to verify the continuity and accuracy of historical data.
Therefore, we remind enterprises to ensure all financial data (especially items like "Net Profit" and "Retained Earnings") in the annual report is true and accurate. It is also advisable to ensure precision (e.g., using six decimal places when reporting in "ten thousands" units) so that data transmitted to the SAFE system aligns with amounts in the audit report (typically in "Yuan" with two decimals), facilitating smooth processing.

Regarding Round-Trip Investment:

What is round-trip investment? According to SAFE Notice [2014] No. 37, it refers to direct investment activities in China conducted by Chinese residents, directly or indirectly through Special Purpose Vehicles (SPVs), by establishing FIEs or projects in China via setup, merger, acquisition, etc., to obtain ownership, control, management rights, etc.
In practice, when applying for profit remittance, banks often require FIEs to proactively disclose any round-trip investment structures. Failure to disclose such arrangements when they exist may constitute illegal foreign exchange evasion under Article 39 of the Foreign Exchange Administration Regulations, potentially leading to fines or even criminal liability.

Regarding the Timing of Withholding Enterprise Income Tax (Time when withholding obligation arises):

During remittance, banks might request proof of tax payment related to the dividend. However, according to current rules, the enterprise can choose to complete the tax declaration and withholding within 7 days afterthe actual payment date of the dividends (i.e., the date funds are remitted abroad, which is when the withholding obligation arises).
To improve fund efficiency, enterprises can opt to conduct the bank remittance first and then fulfill the tax withholding obligation within the stipulated 7-day window. If this approach is used, banks may require the enterprise to sign a Letter of Undertakingpromising to complete the tax withholding on time and in full.

Phase 3: Enterprise Income Tax Withholding & Beneficial Owner Determination

This is the most critical and complex stage, primarily involving declaring and withholding Enterprise Income Tax (EIT) on the remitted dividends for the overseas shareholder. The determination of the shareholder's "Beneficial Owner" status directly impacts the application of tax treaties and the effective withholding tax rate. Key Elements:

Withholding Tax Calculation:

Taxable Income = Full dividend amount received by the non-resident enterprise.
Statutory EIT rate is 20%, reduced to 10% per implementation regulations.
Tax Payable = Taxable Income × Applicable Tax Rate (10% or lower treaty rate).

Tax Exemption for Pre-2008 Profits:

Profits accumulated by FIEs before January 1, 2008, when distributed to foreign investors, are exempt from EIT (Caishui [2008] No. 1).

Tax Treaty Benefits:

China's tax treaties may provide lower rates (e.g., a 5% rate under the Mainland-HK arrangement if the HK resident enterprise directly holds at least 25% of the paying company's capital).
Eligibility for treaty benefits hinges on the shareholder qualifying as the "Beneficial Owner" of the dividends.

Claiming Treaty Benefits:

The system is based on "self-assessment, declaration for enjoyment, and record-keeping." The withholding agent (the FIE) self-assesses eligibility, reports enjoying the treaty benefit during withholding declaration, but must retain supporting documents for potential future tax authority review.

Sinobravo Observations:

Beneficial Owner Look-Through Provision:

If the immediate overseas shareholder (e.g., a HK company) is deemed a "conduit company" lacking substance and thus not the Beneficial Owner, there might still be a path to treaty benefits.
According to SAT Announcement [2018] No. 9, if the intermediate or ultimate shareholder (e.g., a company in Singapore or another jurisdiction with a favorable Chinese tax treaty) qualifies as the Beneficial Owner, holds 100% of the interest in the immediate shareholder, and the treaty terms applicable to that intermediate/ultimate owner are no less favorable than those for the immediate shareholder's jurisdiction, the immediate shareholder maystill access treaty benefits.
This requires providing Tax Resident Certificates for the relevant entities in the chain.
Example:A HK company (not a BO) is owned by a Singapore company (a BO). If the dividend rate under the China-Singapore treaty is the same as or better than the China-HK arrangement, the HK company might still claim the 5% rate, subject to conditions and providing relevant TRCs.

Withholding Agent Service Fee Refund:

The FIE, acting as the withholding agent, can apply to the tax authority between January and March each year for a refund of a service fee (approximately 2% of the total tax withheld) for acting as the agent.

Summary

The determination of Beneficial Owner status, the substantiation of economic substance, and the application of tax treaties directly impact the applicable withholding tax rate on dividends distributed by FIEs to their overseas shareholders. While the tax rate is the final outcome, it is fundamentally determined by the upfront design and arrangement of the ownership structure. Therefore, we recommend that cross-border enterprises conduct forward-looking planning when establishing their holding structures, integrating considerations of relevant tax treaty networks and the economic substance requirements for Beneficial Owner status, to optimize overall tax efficiency.

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