Meaning
Accumulated net profits of a foreign-invested enterprise represent the retained earnings remaining after mandatory corporate allocations have been satisfied. The management of retained earnings in China is subject to joint regulatory oversight by company law and foreign exchange controls. These earnings can be repatriated to foreign shareholders as dividends or reinvested in the domestic market to expand corporate operations.
Statutory Reserve
Before a corporate entity can distribute dividends, it must allocate ten percent of its annual after-tax profits to a statutory reserve fund. This allocation is mandatory until the accumulated reserve reaches fifty percent of the registered capital of the enterprise.
Distribution Process
The board of directors must approve the dividend distribution plan, which must then be verified against audited financial statements. The enterprise must pay the ten percent withholding tax before the bank will authorize the offshore transfer of the distributed earnings. Tax bureaus and commercial banks check the tax receipts and dividend resolutions carefully to confirm that only realized profits are being distributed.
This process prevents corporations from repatriating capital under the guise of dividend distributions.
Reinvestment Benefit
If a foreign investor decides to reinvest these earnings directly into a domestic enterprise, they may qualify for a deferral of the withholding tax. This policy encourages the retention of capital within the domestic economy.
