Intermediary Equity Layers in Cross Border Investment Structures
Intermediary equity layers require operational substance in holding jurisdictions to secure tax treaty rates and clear indirect transfer tax audits.
Profit Repatriation Sequence
Meaning
Mandatory administrative procedures that a foreign-invested enterprise in China must follow to remit dividends to an offshore parent company. This profit repatriation sequence is overseen by the State Administration of Foreign Exchange and requires the completion of a statutory audit and the settlement of all applicable taxes. The process applies only to audited accumulated profits that have not been previously distributed.
Statutory Audit
Every fiscal year, a certified public accountant must verify the company’s financial statements to ensure the profit figure is accurate. This audit confirms that the company has set aside the required ten percent of after-tax profits into a mandatory reserve fund until that fund reaches fifty percent of the registered capital. Without this verification, the board of directors cannot legally pass a resolution for a dividend payment.
A Withholding Tax
A withholding tax of ten percent is generally applied to the dividend amount unless a lower rate is available through a double taxation treaty. The enterprise must obtain a tax payment certificate from the local tax bureau to prove that the liability has been fully satisfied. This document is a critical requirement for the final bank transfer, as banks are prohibited from processing the remittance without it.
The Fund Transfer
The commercial bank performs a final check of the board resolution, the audit report and the tax certificates before converting the renminbi into the target foreign currency.