Top Tips: How to ensure safe payment into China
To ensure you don’t get a stern ticking off from a regulator, CT asked Russell Brown, of accounting firm Lehman Brown, his top tips on successful cross-border payment with China.
- Make sure any funds coming into China have supporting documentation and that the appropriate filings have been made. All funds coming into China should be registered properly as to what they are: revenue from services, products or investment.
- Investment—either registered capital or an investment loan — needs to be registered in advance, forming part of the articles of association and, where a joint venture, the joint venture contract. Dividends can be paid on post-tax profits and interest on investment loans.
- Loans can only be repaid by the Chinese entity if they were registered with State Administration of Foreign Exchange. If the funds were paid to China as an intercompany loan and the total investment does not include a provision for a loan, and the loan has not been registered with Safe, then future repayment will not be possible.
- Safe does not allow repayment of expenses to overseas companies, where they are recharging expenses, unless under a cost-sharing agreement. Therefore, it is better for the Chinese company to incur and pay for these expenses directly.
- All service agreements for services provided overseas by the parent or associated company should clearly state the nature of the services and the method of charging, and should not be worded in a way they could be considered management fees, which are classified as non-deductible by the tax authorities.
- In order to avoid a challenge by the tax authorities in relation to creation of a “permanent establishment”, and therefore a withholding of corporate income tax, it is better for two different services agreements to be signed, one for services provided in China by overseas personnell, and one for services provided totally outside of China.
- Where services and royalties are being paid, if the amount of payment is below $30,000 per day then payment can be made before tax approval by presenting the contract (registered where required) and invoice to the bank. If the amount is above $200,000 per payment, approval from Safe is required. To keep it simple, it makes sense to keep payments below this figure so as to avoid Safe.
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