Generally, Chinese subsidiaries’ profit distribution to German parent companies require the following conditions to be met: 

• Annual audit of financial statements and issue of the audit report
• Completed annual CIT return with evidence of the orderly payment of CIT
• If there are accumulated losses of the previous year in the balance sheet, these must first be made up
• Statutory surplus reserves must be withhold

When a company distributes its after-tax profits for the current financial year, it has to place 10% of its annual after-tax profits into a mandatory surplus reserve fund until it reaches 50% of the companies’ registered capital.

Therefore, the Chinese subsidiary, as a wholly foreign-owned enterprise (WFOE), should withdraw the relevant reserves according to the regulations before distributing profits to the German parent company.

The general process of paying dividends to overseas parent companies:

• Declaration of dividends by the General Meeting of Shareholders 
• Review of the beneficial owner by the tax authority
• Application to the tax authority for tax benefits within the framework of corresponding agreements (double taxation agreements) and retention and payment of withholding tax*
• Submission of relevant documents to the bank; after approval by the authority SAFE, transfer of dividends to overseas will be possible

*Withholding tax is usually 10% (5% in compliance with the provision of the current Sino-German double taxation agreement (DTA), for details pls. refer to the table below).

5%

5% of the gross amount of the dividend where the beneficial owner of the dividend is a company (not a partnership) that directly owns at least 25% of the capital of the paying company.

10%

10% of the gross amount of the dividend in all other cases

15%

15% of the gross amount of the dividends where those dividends are paid out of income or gains derived directly or indirectly from immovable property within the meaning of Article 6 by an investment vehicle which distributes most of this income or gains annually and whose income or gains from such immovable property is exempted from tax;

Source: Article 10 dividends - Agreement between the Federal Republic of Germany and the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital 

Other relevant points:

If the amount of a single payment exceeds USD 50.000,00, a special tax registration for payment to overseas must be done in the tax bureau.

In case you have any further questions concerning distribution of profits or market entry in China, please do not hesitate to contact us for a free initial consultation via e-mail: bdp.china@bdp-team.de or telephone: +49 (0) 30 4433 610.