For numerous foreign companies operating in China, efficiently repatriating profits earned in the country has been a persistent challenge. Leveraging NAV loans is one way businesses in China can strike a balance between accessing the necessary capital for growth and maintaining liquidity. NAV plays a crucial role in capitalising companies, particularly during their early stages in China. One significant aspect of this is the utilisation of NAV loans, wherein a loan of up to 200% of the capital can be obtained. This approach offers distinct advantages, as the loan can be repaid easily, resulting in less cash being trapped within the Chinese market.

Dividend distributions have been the conventional approach to bringing funds back home, but the process isn’t always straightforward and can be costly. Foreign-Invested Enterprises (FIEs) in China typically face a 25% corporate income tax (CIT) on their gross profit, and an additional 5 – 10% withholding tax when remitting dividends offshore, subject to any applicable double taxation agreement (DTA).

Moreover, dividend payments can only be made if the previous years’ losses have been offset, and FIEs are required to set aside 10% of their annual profits into a reserve fund until 50% of their registered capital is reserved. As a result, a considerable amount of cash gets trapped within China.

To mitigate the extremely delayed remittance of dividend and lack of interim dividend distribution options, foreign investors have been considering alternative approaches to dividend payments. One such method is charging their Chinese subsidiaries service, management or royalty fees, which allows for greater flexibility and avoids some of the limitations imposed by dividend payments. However, it is important to note that taxes, specifically CIT, may be once more generated in the shareholder’s home country as a result of this fee income.

A more flexible and tax-efficient alternative is leveraging outbound intercompany loans. This method allows companies to repatriate remaining cash while providing the flexibility to reinvest back into China when necessary for business expansion.

There are two primary schemes for extending loans to offshore affiliates: loans in foreign currency regulated by the State Administration for Foreign Exchange (SAFE) and RMB loans regulated by the People’s Bank of China (PBOC).

Companies such as Coca-Cola have successfully utilised the PBOC scheme, enabling them to send a RMB250m loan to an offshore affiliate within a mere tenworking days. Reports also indicate that medium-sized companies have successfully repatriated cash using this method. In comparison to dividend distribution, outbound loans offer two significant benefits: greater flexibility and a deferral of the 10% dividend withholding tax. As with any business practice in China, variations exist between cities and even districts, and individual banks maintain their own approval policies. It is crucial to consult with legal professionals and your bank at an early stage to determine the specific local requirements when utilising intercompany loans to release trapped cash.

In addition to intercompany loans, two other recent developments deserve a mention. Multinational corporations established in the Shanghai Free Trade Zone can now establish a two-way RMB cash pooling system, integrating their onshore RMB cash flow generated throughout China with their global cash pool, subject to certain restrictions. Some major MNCs have already implemented such cash-pooling systems with reputable banks.

Another method for utilising trapped cash involves providing it as collateral for loans obtained by offshore affiliates. While this was previously achievable by providing a guarantee to a PRC bank, the process has become much more streamlined.