Legal entity setup in China: Dividends and CFCs
- Максим Миненко
- 15 мая
- 2 мин. чтения
Legal entity setup in China gives entrepreneurs many opportunities for growth and international expansion. In this article, we will explain in detail how dividends are paid, what foreign participants need to pay attention to, and what obligations arise for residents of countries that regulate Controlled Foreign Companies (CFCs).
Chinese companies are allowed to distribute dividends and transfer them abroad.
The process of profit and dividend distribution in a Chinese company:
Payment of all taxes;
Contribution of 10% of the company’s net profit to a reserve fund (this corporate fund is created to cover possible losses, increase production, and expand the company’s activities. The maximum amount in the fund can be 50% of the company's registered capital);
Repayment of any losses and debts;
Contributions to other company funds (if they exist);
Payment of dividends to participants, according to their shareholding.
Participants, no matter their citizenship, must pay a 20% dividend tax. There are no other taxes on transferring profits out of a Chinese company. If the shareholders' meeting or the board of directors distributes profits without making the required contributions to company funds, this can lead to fines, and the profits must be returned to the company.
Controlled Foreign Companies (CFCs)
For founders who are residents of certain countries, business setup in China or company formation in Singapore and Hong Kong comes with obligations:
Notify the tax authorities about participation in a foreign company;
Notify about any change in the size of your ownership share;
Notify about the end of participation in a foreign company;
Notify about a CFC (Controlled Foreign Company);
Submit income declarations related to the CFC and pay personal income tax.
Usually there is a several month deadline to notify the tax authorities of your country after acquiring a share in a foreign company.
You can find detailed instructions on timing and procedure to notify about a CFC on the official website of the tax authorities in your country.
Doing business with China requires not only building strong business connections but also carefully following the legal requirements of both countries. Understanding how profits are distributed, paying taxes correctly, and submitting CFC notifications on time will help avoid penalties and follow audit and compliance in China and your country.
