1. Overview

In China, strict management is imposed on the inflow and outflow of foreign currency, and when conducting international transactions or overseas remittances, it is necessary to comply with the regulations of the State Administration of Foreign Exchange (SAFE) and the notices from the tax authorities. Foreign exchange transactions are categorized into "capital transactions" and "current transactions," with payments related to trade transactions and service transactions being relatively liberalized, while capital transactions such as investments and loans remain heavily regulated. When foreign companies receive service fees, dividends, royalties, etc., from China, properly arranging tax procedures and foreign exchange management procedures is key to preventing payment delays and remittance refusals.

2. Key Topics

Foreign Exchange Management System and Banking Procedures

The foreign exchange management in China is conducted by the SAFE and tax authorities, and foreign currency payments related to trade transactions are carried out through designated banks. In import and export transactions, companies are allowed to present actual transaction documents (such as contracts, invoices, customs documents, etc.) to purchase foreign currency from banks and make overseas remittances. Since 2012, SAFE has shifted the foreign exchange management of goods trade from sequential inspections to off-site management, introducing a system to reconcile the flow of goods and the flow of funds in the database.

Tax Record System for Service Transactions

For overseas remittances related to service transactions, dividends, royalties, interest, and other non-trade transactions, a Tax Clearance Certificate (TCC) was traditionally required. However, this was replaced by a tax pre-recording system due to the joint announcement by SAFE and the Tax Administration in 2013 (Announcement 40). As a result, when the remittance amount exceeds $50,000 per transaction, the payer must submit a record to the tax bureau, and the remittance process at the bank is carried out after the record is completed. The latest notice in 2021 simplified the process so that multiple remittances under the same contract can be covered by a single record, and electronic submission online (E-tax) has also become possible.

Tax Treaties and Beneficial Ownership

Just because you have completed the record-keeping procedure does not mean you can immediately enjoy the reduced tax rate under the tax treaty. To receive the exemptions based on the treaty, you must submit information reporting forms such as the "Application for Tax Treaty Benefits for Non-Resident Taxpayers" and provide proof of beneficial ownership and residency certificates, among other documents. The withholding agent (the payer in China) will verify the completeness of the documents, calculate the tax amount according to the applicable treaty, and report to the National Taxation Bureau after payment. If the documents are incomplete, withholding will be conducted at the domestic tax rate (usually 10%).

Common Challenges and Solutions

1. Delays in Remittance Due to Document Deficiencies：
   Deficiencies in contracts, invoices, and tax record documents that serve as the basis for remittance can lead to banks refusing foreign currency purchases. Tax records must be completed before remittance, and it is necessary to confirm that the tax obligations of the recipient are clear.
2. 
   
3. Errors in Tax Classification：
   Misclassifying the nature of income, such as technical service fees, royalties, dividends, and capital gains, can change tax rates and procedures, so it is important to ensure consistency between contract wording and actual circumstances.
4. 
   
5. Remittance Limits and Cumulative Management：
   Remittances exceeding $50,000 in a single transaction are subject to record-keeping requirements, and there is an increasing trend to monitor multiple remittances cumulatively. Splitting large remittances to avoid this may be considered fraudulent.
6. 
   
7. Profit Remittance to Headquarters：
   While complying with withholding taxes and record-keeping procedures applicable to dividend remittances and service fee remittances, it is necessary to consider various schemes such as profit reinvestment and internal transfers of royalties.

3. Related Articles

Deepen your understanding of China's foreign exchange management and compliance through selected insights and the latest updates:

• [For Foreign Corporations] Amendments to Chinese Company Law and Capital System

•