"We have valid reasons and we can provide sufficient documents, so why can’t we remit our money out of China?”
Foreign investors have to get approval from each relevant authority before they can go to the bank to make the actual remittance. Unfortunately, there is no single government authority that coordinates the controls, and the various agencies do not share a centralized database. So at the bank, the conversation can run thus:
Bank: “Some documents are missing. We regret that we cannot help on the remittance. Please check back with the relevant government authorities.”
Foreign investor: “They said we no longer need to submit those documents.”
Bank: “We don’t know if that is the case. We just follow instructions. We will need to clarify.”
Designated as gatekeeper by SAFE, the bank is responsible for ensuring that the required documents, i.e. approval documents from various government authorities, are in place. However, while banks have instructions regarding the required documents for different types of funds, they may not always be updated in a timely manner when different authorities issue new procedures or requirements.
In such cases, the bank will not process the remittance, even though the remitting company followed the updated procedures to the letter. The bank will have to communicate with the relevant authorities, and that could mean a long wait for the remitter.
First, Pay Your Taxes
No remittance can be made without the foreign investor presenting proof that it has paid the correct taxes. But making tax payments and obtaining tax clearance certificates for the purpose of making remittances can be time-consuming procedures.
Foreign investors are required to pay taxes, including withholding tax and business tax, when applying for tax clearance certificates. They are subject to different tax treatment depending on how they are constituted. A company that is constituted as a Permanent Establishment (PE) will be taxed differently from an enterprise that is not a PE. In practice, non-PE foreign investors need to submit numerous supporting documents to substantiate their non-PE status, and the final tax assessment is highly dependent on the officials’ tax knowledge and personal judgment.
In order to obtain tax clearance certificates, enterprises have to deal with two different tax authorities, the State Tax Bureau and Local Tax Bureau. There is no shared database between these two bureaus, meaning that enterprises have to receive separate approvals. In addition, enterprises cannot start applying for the Local Tax Bureau’s approval unless they have already received approval from the State Tax Bureau.
Running the Gauntlet
Depending on the nature of the funds they want to remit, enterprises may have to deal with agencies other than the two tax bureaus, which further complicates the process. Take for example, the remittance of trademark royalty:
There are many bumps in the road in remitting trademark royalty. The enterprise must first obtain registration from the trademark office. Any licensing agreement must then be registered with the same office within three months of signing. But typically in China, other parties may have registered the trademark before the foreign owner opened an office there, meaning that the trademark holder is unable to register its brand. In this case, the bank will not process the remittance even if the relevant taxes have been paid.
We also came across some cases in which the State Tax Bureau did not agree with the valuation placed on the trademarks. Because the trademarks were not well-known in China, the agency said, the enterprise could not have been paid the amount of royalties it wants to remit. The foreign investor had to justify the valuation by presenting supporting documents such as its agent’s report and financial data to convince the tax officials.
In contrast to the case law system used in many Western countries, China’s legal foundation is based only on publicized laws, regulations and notices. As such, when there are grey areas for special issues that are not clearly defined in the law, government officials may postpone or refuse the remittance.
We came across such a case, detailed below, which is rather common for many multinational companies in China:
Company A, the PRC enterprise, subsidiary of Company B
Company B, the overseas enterprise, parent company of Company A
Company B charged Company A “management fee” that Company A must remit overseas
According to China’s Corporate Income Tax (CIT) Law, management fees are not deductible items. However, there is no clear explanation in any tax regulation or notice what exactly a “management fee” is. Company B argued that the management fee it is charging Company A was a substantial service fee, and should therefore be treated as a “service fee” as described in tax regulations.
But the State Tax Bureau still refused to issue a tax clearance. Said the tax official: “We cannot accept an application without clear instructions from current laws and regulations, even if Company B was willing to pay the tax.”
Interestingly, the result of this case could have been completely different if Company B used the term “management service fee” instead of just “management fee” – the State Tax Bureau considers management service fees as normal service charges, as the term is defined in current tax regulations.
What Can Foreign Investors Do?
Foreign investors are not completely helpless in navigating China’s remittance maze. We suggest the following:
- Conduct advance planning. With proper planning, enterprises can avoid getting trapped in red tape. They may also reduce relevant tax costs. For example, they should make sure that the type of service they are charging for are clearly defined in current tax directives. Avoid charging for “uncertain” items such as management fees. Check the detailed requirements from different government authorities in advance. It is also helpful to research tax treaties between China and other countries to find potential tax planning opportunities.
- Structure contracts with tax efficiency in mind. For example, a service contract should clearly state the nature of the services to be provided, the service location, the relevant fee-charging method and so on. As a bonus, a well-structured contract can also create opportunities for reducing tax costs, such as claiming corporate income tax exemptions on the basis of non-PE status.
- Keep all supporting documents. Enterprises should prepare and have on hand all supporting documents as evidence of charges, such as working papers, meeting notes, correspondence, staff work plans and staff time sheets, even if these are not specifically required. Well-prepared application packages help facilitate the entire remittance process and also give government officials confidence to approve the application.
About the Authors
Bolivia Cheung is Partner, PRC Tax and Business Advisory, at KPMG China. She has a BA (Hons) in Business Studies and a Master of Science in Accounting, and is a fellow of the Hong Kong Instittue of Certified Public Accountants and a member of CPA Australia and ACCA.
Ryan Huang is Tax Manager, PRC Tax and Business Advisory, at KPMG China. He has a Bachelor of Economics in financial management and an MBA in corporate finance, and is a member of China Certified Agent.
Lilly Chen is Tax Assistant Manager, PRC Tax and Business Advisory, at KPMG China. She has a Bachelor of Law in economic laws, a Master of Science in business management, and is a member of China Certified Tax Agent.