Meaning
Contractual arrangements secure the payment of tax liabilities by placing a portion of the transaction proceeds in a local bank account. An onshore escrow agreement is used during the sale of a Chinese business to ensure that funds are available for the tax bureau. This mechanism protects the buyer from the risks of the seller failing to remit the required withholding tax.
Fund Security
Bank accounts opened specifically for this purpose hold the funds until the tax clearance is completed. Under the terms of an onshore escrow agreement, the bank acts as a neutral third party that releases the money only when presented with a tax payment certificate. This prevents the seller from repatriating the full amount before the local obligations are settled.
Payment Guarantee
The amount held in the account usually matches the estimated ten percent withholding tax. An onshore escrow agreement provides a guarantee to the Chinese tax authorities that the revenue will be collected. It also simplifies the process for the transferee who is legally responsible for the withholding duty.
Local Execution
Legal counsel for both parties must draft the terms to comply with Chinese banking regulations. The onshore escrow agreement must specify the conditions for disbursement and the handling of any interest earned on the deposit. Once the tax bureau confirms receipt of the payment, the remaining balance is transferred to the seller.
