China: Reducing trapped cash in China with outbound intercompany loans

Last Updated: 5 October 2014

Many foreign companies struggle to get profits earned in China out of the country in an efficient way. During the past year, repatriating funds has become much easier with relaxed requirements for intercompany loans to affiliates outside China.


The most straightforward way to bring money home is to have your Chinese subsidiary (Foreign-Invested Entity, FIE) pay out dividend. However, this is not always as easy as it sounds; moreover, it is expensive. FIEs normally pay 25% corporate income tax (CIT) on their gross profit, and when remitting dividend offshore another 5-10% withholding tax is levied (depending on whether a double taxation treaty (DTA) applies).

Dividend may only be paid if all losses for previous years have been made up. Furthermore, an FIE must put 10% of its annual profits into a reserve fund until 50% of its registered capital has been reserved. This inevitably results in cash being trapped in China.

The timing of dividend payments is also restricted. Banks only process dividend payments on the basis of an audit report and tax returns proving the amount of distributable profits and payment of taxes. This makes the payment of interim dividends virtually impossible, and since the audit report and tax returns usually become available only in June or July, most dividend payments must wait until the second half of each calendar year. Sometimes it may take even longer. In a recent case, an FIE waited for six months to obtain all required documents.

Service Fees and Royalties

Due to the costs and limitations of dividend payments, many foreign companies try to minimize their profits in China by charging their Chinese subsidiaries service fees and royalties. This has tax implications (VAT or business tax is levied, and a 10% withholding tax applies, unless the relevant DTA specifies a lower percentage, although service fees are often charged at 10% regardless of any DTA), but the overall tax burden is usually substantially lower than for dividends.

Service fees and royalties are, however, only allowed for genuine arm's length transactions directly related to the FIE's business (otherwise the payment is not recognized as an expense and 25% CIT will be levied). This condition puts a natural limit on the amount which can be repatriated by using service fees and royalties.

Outbound Intercompany Loans

One way to send the remaining cash back home is through outbound intercompany loans. This has the added advantage that cash may be sent back to China in due course when the business needs to expand further. Granting such loans has become much easier during the past year.

There are basically two schemes for an FIE to extend loans to an offshore affiliate: loans in foreign currency regulated by the SAFE (State Administration for Foreign Exchange) and RMB loans regulated by the PBOC (People's Bank of China). The key features of each scheme are set out in the table below.

Regulator SAFE PBOC
Currency Foreign currency RMB
Lender Onshore corporates
(including FIEs)
Onshore corporates (including FIEs, excluding real estate companies)
Borrower Offshore companies having an "equity relationship" with the lender (prior to 2014: limited to FIE's offshore parent) Related companies in the same group
Quota Max. 30% of an FIE's registered capital (the limit of the sum of dividends payable / un­distributed profits was abolished in 2014) No quota – lender to retain sufficient cash for its operations
Registration / approval SAFE registration, local SAFE approval when exceeding quota Bank approval only (in most cities)
Tenor No limit (2 year maximum tenor abolished in 2014) No limit
Source of funds Self-owned or borrowed Self-owned
PRC tax implication 25% CIT and 5-10% business tax on interest earned by lender 25% CIT and 5-10% business tax on interest earned by lender

Coca Cola was reportedly one of the first companies to utilize the PBOC scheme late last year and managed to send out a RMB 250 million loan to an offshore affiliate within 10 working days. Later reports mention that medium-sized companies have also been able to repatriate cash the same way. Compared to dividend distribution, there are two key benefits in providing outbound loans: (a) greater flexibility and (b) deferral of the 10% dividend withholding tax.

As becomes clear from the table above there is no connection with the FIE's distributable profit (for the SAFE scheme this was previously the case, but it has been abolished earlier this year), meaning that cash which may not (yet) be distributed as dividend can be transferred out as a loan (although under the SAFE scheme there is a cap of 30% of the registered capital). This opens the possibility for de facto interim dividends (since there is no longer any need to provide audited accounts) and to repatriate profits normally stuck in the reserve fund (see above, up to 50% of the FIE's registered capital ultimately needs to be reserved).

Under the SAFE scheme, loans could be granted for a maximum of two years, but this requirement has been removed this year as well. As long as reasonable business terms are in place, both schemes provide flexibility in terms of repayment and applicable interest rate.

As always in China, practices differ per city (and even per district) and also banks are maintaining their own policies on the conditions for approval. We understand that in practice, lenders may need to satisfy certain basic financial criteria (usually net assets, net profits and net cash flow of the lender all need to be positive, and a no-objection letter from the local tax authorities may also be required). If you intend to use intercompany loans to release trapped cash, make sure to check with your lawyers and bank at an early stage what the exact local requirements are.

Outbound loans have tax implications as well: the FIE needs to pay 25% CIT and business tax on the interest income, though the offshore borrower may offset the CIT paid by the lender if the applicable DTA provides for this. The greater flexibility and deferral of the 10% dividend withholding tax in many cases will outweigh these costs of outbound intercompany loans.

Cash Pooling in the Shanghai FTZ and Cross-border Security

Finally, it is worth briefly mentioning two other recent developments, which are outside the scope of this article, but could also be helpful in reducing cash trapped in China.

Multinational corporations (MNCs) established in the Shanghai Free Trade Zone may now set up a two-way RMB cash pooling system. Several banks already offer such system, which enables MNCs to integrate their onshore RMB cash flow (generated throughout China) with their global cash pool (although certain restrictions apply). Saint-Gobain, Dover Corporation (both with HSBC), Sonepar (with RBS) and Roche (with Citi) are reportedly among the MNCs who already have put such cash pooling systems in place.

Another method for an FIE to utilize trapped cash is to provide it as collateral for loans obtained by its offshore affiliates. This was already possible by providing a guarantee to a PRC bank (which in turn extends the guarantee to the offshore affiliate bank providing the loan), but since June 2014 providing outbound security has been made much easier. An FIE may now directly provide outbound credit support for its offshore affiliates to an offshore lender in both RMB and foreign exchange (arguably, this was already allowed for credit support in RMB). SAFE approval and the quota for credit support in foreign currency have also been abolished.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.