Getting Profits Out: Dividends, Withholding Tax and the Reinvestment Credit
China Field Notes · by Daona · 13 min read
Paying a dividend from a Chinese subsidiary is legal, routine and handled by ordinary banks. What trips companies up is the order of the steps — audit, tax, losses, reserves, resolution, tax filing, bank — and the decision they skip: whether some of that money should stay in China, where a new tax credit now rewards it.
Many foreign owners still fear that money goes into China easily and comes out with difficulty. For a company that has made a real profit, paid its taxes and kept clean books, that fear is out of date. The State Administration of Foreign Exchange (国家外汇管理局, SAFE) treats profit payments to a foreign shareholder as a current-account item, and the work is done by your bank.
What has not gone away is the sequence. A dividend that skips a step will stop at the bank counter or cause problems later. And since 2025, ask before every distribution: should part of this money be reinvested in China instead?
A Chinese limited liability company — including a WFOE (Issue 05) — distributes only after-tax profit left after these steps, under the Company Law (公司法) in force since 1 July 2024 and tax law:
| Step | What happens | Timing |
|---|---|---|
| 1. Close | Calendar-year close | Jan–Feb |
| 2. Audit | Chinese CPA firm audits the annual statements | By April |
| 3. CIT | Annual reconciliation (企业所得税汇算清缴) filed, balance paid | By 31 May |
| 4. Losses | Accumulated losses made up first | Distribution plan |
| 5. Reserve | 10% of after-tax profit to the statutory reserve (法定公积金) until it reaches 50% of registered capital | Distribution plan |
| 6. Optional reserve | If shareholders decide | Same |
| 7. Resolution | Shareholder approves the distribution | After audit |
| 8. Pay | Board pays within six months of the resolution | After step 7 |
Losses first. A dividend paid in breach of the rules must be returned, and responsible directors and managers can be liable for losses caused.
The reserve is cash that stays. A company with ¥20 million registered capital keeps setting aside reserve until it holds ¥10 million — one reason not to inflate registered capital (Issue 13).
Paid-in matters in joint ventures. Profits follow paid-in capital unless all shareholders agree otherwise.
A dividend to a foreign company carries 10% withholding corporate income tax. The Chinese company is the withholding agent (扣缴义务人): it deducts, files and pays the tax, then remits the net amount.
Treaties can reduce it
Under the arrangement with Hong Kong SAR: 5% if a Hong Kong resident company directly holds at least 25% and is the beneficial owner (受益所有人); otherwise 10%. Singapore's treaty has a similar 5% rate. Conditions differ by treaty; some add a minimum holding period.
Beneficial ownership: a holding company with no staff or real business that passes the dividend straight on is unlikely to qualify.
Principal purpose test: benefits can be denied where getting them was a principal purpose — e.g. a Hong Kong company set up last month to receive this year's dividend.
Self-assessment, not approval. Since 2020, under STA Announcement [2019] No. 35, the foreign shareholder judges its own eligibility, gives the paying company an information report form and keeps supporting documents — beneficial-ownership evidence, tax residence certificate — for later inspection. Underpaid tax can be recovered with late-payment interest.
Individual shareholders: new since 1 September 2026. Dividends foreign individuals receive from foreign-invested enterprises are no longer exempt. They are taxed at 20%, withheld by the company and reported by the 15th of the following month. Commentators read it as applying by payment date, not by the year the profit was earned. If you hold your WFOE personally, talk to a licensed tax professional before the next distribution. See Issue 09.
Tax record filing. A single outbound payment of more than US$50,000, dividends included, needs a tax record filing for outbound payments (服务贸易等项目对外支付税务备案), normally online. See Issue 08.
What the bank checks for profit remittances above US$50,000:
· Shareholder decision or board resolution on distribution
· Tax record filing form
· Financial statements showing the profit — in practice, audited
· Evidence of withholding tax paid, where asked
The bank also checks that prior losses are made up, and annotates the filing form with each remittance. Pay in renminbi or buy foreign currency at the bank; no separate SAFE approval is needed. Ask your bank for its checklist a few weeks ahead.
The deferral
Under Caishui [2018] No. 102 (财税〔2018〕102号), profits a foreign investor uses for a direct investment in a non-prohibited sector can have their withholding tax deferred: capital increase, new company, or equity bought from unrelated parties (listed shares generally excluded). Cash must go directly from the paying company to the investee or seller. Deferral is not exemption — tax falls due when the investment is recovered.
The reinvestment tax credit (2025–2028)
Announcement [2025] No. 2 of the Ministry of Finance, the State Taxation Administration and the Ministry of Commerce adds a credit for reinvestments from 1 January 2025 to 31 December 2028:
| Feature | Rule |
|---|---|
| Credit | 10% of the reinvested amount, or the treaty dividend rate if lower |
| Investment | Capital increase, new company, equity from unrelated parties; listed shares excluded except qualifying strategic investments |
| Sector | Catalogue of Encouraged Industries for Foreign Investment (鼓励外商投资产业目录) |
| Holding | At least 5 years (60 months) |
| Offsets | Tax on dividends, interest, royalties etc. received from the distributing company after the reinvestment date |
| Carry-forward | Until used, including after 2028 |
| Early exit | Within 5 years: deferred tax due, credit reduced, excess repaid — within 7 days |
| Confirmation | Commerce authority issues a Profit Reinvestment Confirmation Form (利润再投资情况表) |
STA Announcement [2025] No. 18 adds that using distributed profit to pay in already-subscribed registered capital counts as an increase — relevant if your WFOE still has capital to pay in under the five-year rule (Issue 13).
A WFOE with ¥20 million registered capital earns ¥10 million before tax. No accumulated losses; statutory reserve at ¥2 million. Exchange-rate effects ignored.
| What can be distributed | Amount |
|---|---|
| Profit before tax | ¥10,000,000 |
| CIT at 25% | − ¥2,500,000 |
| After-tax profit | ¥7,500,000 |
| Statutory reserve 10% (balance ¥2.75m, cap ¥10m) | − ¥750,000 |
| Distributable | ¥6,750,000 |
| A: pay all, 10% | B: pay all, 5% | C: reinvest ¥5m | |
|---|---|---|---|
| Paid abroad | ¥6,750,000 | ¥6,750,000 | ¥1,750,000 |
| Reinvested (encouraged sector) | — | — | ¥5,000,000 |
| Withholding tax paid now | ¥675,000 | ¥337,500 | ¥175,000 |
| Withholding tax deferred | — | — | ¥500,000 |
| Credit earned (10%) | — | — | ¥500,000 |
| Net cash to parent now | ¥6,075,000 | ¥6,412,500 | ¥1,575,000 |
In C, the ¥1.75m is assumed paid before the reinvestment date, so the credit does not reduce its tax.
The following year under Route C:
| Dividend from the same WFOE | ¥4,000,000 |
| Withholding tax at 10% | ¥400,000 |
| Offset by credit | − ¥400,000 |
| Withholding tax paid | ¥0 |
| Credit carried forward | ¥100,000 |
Illustrative. Does not refer to any real company.
Route C puts ¥5 million to work in China rather than in the parent's hands. It turns ¥500,000 of tax into a deferral and earns a ¥500,000 credit that cuts next year's tax to zero. The deferred tax falls due only if the investment is withdrawn — and within five years, the credit is clawed back too. At a 5% treaty rate, both would be calculated at 5%.
| Channel | Typical Chinese taxes | Deductible? | Watch |
|---|---|---|---|
| Dividend | 10% WHT (treaty may reduce) | No | Losses, reserve, timing |
| Service fee | 6% VAT; CIT if a taxable presence arises | Yes, if genuine, arm's length | Proof of benefit |
| Royalty | 6% VAT; 10% WHT | Yes, if arm's length | Licence registration, rate |
| Interest | 6% VAT; 10% WHT | Within debt-equity limits | Foreign-debt registration |
Local VAT surcharges may apply, and the US$50,000 tax filing covers all of them. These are related-party transactions, reviewed under the arm's length principle; related-party forms go with the CIT return (Issue 18). A management fee without evidence of services is a classic disallowance. Use these channels because the services, IP or loans are real — not to move profit at a lower rate.
· Capital reduction (减资): resolution, creditor notice and public notice, registration with the market regulator. Creditors may demand repayment or security. Part may be taxed as a dividend if there are retained earnings.
· Sale: a foreign company's gain on selling equity generally bears 10% withholding CIT unless a treaty says otherwise.
· Liquidation: slowest — tax clearance, employees and deregistration first. Plan any of these with licensed law and accounting firms.
Plan the dividend in Q1, not December. A plan drafted in January can be paid in June; one drafted in November often waits until next summer.
Decide on reinvestment before you declare. Deferral and credit need the money to go directly into the new investment. Once it has left China, that chance is gone.
Check the treaty claim yourself. Under self-assessment, your group carries the risk.
If you hold the WFOE personally, revisit the structure with licensed tax and legal professionals, with full disclosure to the authorities.
"China doesn't let profits out." Ordinary dividends go through your bank. Delays come from missing documents, not quotas.
"We can pay quarterly from management accounts." Banks generally want audited figures and a tax filing.
"Our Hong Kong company gets 5% automatically." Only with a 25% direct holding, beneficial ownership and no abusive purpose.
"Reinvested profits are tax-free." Deferral postpones; the 2025 credit is a real saving only for encouraged sectors held five years.
"Service fees are a cheaper dividend." They carry VAT and transfer-pricing scrutiny.
Your checklist
☐ Year-end close and audit timetable agreed by January
☐ CIT annual reconciliation filed by 31 May
☐ Prior losses covered and statutory reserve calculated
☐ Shareholder decision signed; payment within six months
☐ Treaty eligibility checked and documents retained
☐ 20% withholding for foreign individual shareholders from 1 Sep 2026
☐ Tax record filing for payments above US$50,000
☐ Bank checklist obtained in advance
☐ Reinvestment considered before declaring
☐ Intercompany agreements reviewed for arm's-length support
Rules as of October 2026. This column provides general information, not legal or tax advice. Audits, tax filings and treaty claims should be handled by your finance team and licensed accounting and tax firms; foreign-exchange payments are processed by your bank. Licensed firms' fees are settled by the client at cost.
China Field Notes · by Daona