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Compliance Guide on Profit Distribution and Capital Reduction for Foreign-Invested Enterprises in China

I. Notes on Profit Distribution

Distribution Order and Ratio
Foreign-invested enterprises (including joint ventures, cooperative ventures, and wholly foreign-owned enterprises) must first pay corporate income tax. Profits are then used to offset losses, establish a reserve fund (≥10% of after-tax profits, can be stopped when accumulated to 50% of registered capital), a business development fund (optional for foreign-invested enterprises), and an employee welfare fund (for collective welfare). Remaining profits are distributed according to the contribution ratio (joint ventures), contractual agreements (cooperative ventures), or articles of association (wholly foreign-owned enterprises). Previous years' undistributed profits can be included in the current year's distribution.
Application of Special Policies

 

  • Deferred Taxation for Reinvestment by Overseas Investors Overseas investors who reinvest their distributed profits in direct investment within the country in non-prohibited sectors (such as capital increase, new enterprise establishment, equity acquisition, etc.) and meet the conditions may temporarily not be subject to withholding income tax. Funds must be transferred directly and cannot be circulated indirectly.
  • Asset Appraisal Appreciation Restrictions Undistributed profits and balances resulting from the appreciation of assets in foreign investment must be transferred to capital surplus reserve and cannot be used for shareholder dividends.

 

  1. Pre-distribution Profit Restrictions
    Enterprises generally should not pre-distribute profits. If pre-distribution is necessary (good performance, no due debts, sufficient profit after prepayment of income tax), approval from the competent financial authority is required.

II. Key Points of Capital Reduction

  1. Legal Conditions and Procedures
  • Conditions After the capital reduction, the registered capital ≥ the actual paid amount, no legal disputes, and compliant with the regulations on the ratio of total investment to registered capital (refer to the Business and Industry Document [1987] No. 38).
  • Process ：
    ① Board Resolution → ② Submit Application and Materials (including Audit Report, Creditor List, Debt Settlement/Guarantee Statement) → ③ Approval by the Ministry of Commerce → ④ Announcement in Provincial-level or above Newspapers (accepted after 45 days) → ⑤ Business Registration Change.
  1. List of Materials
  • Basic Documents: Capital Reduction Application, Board Resolution, Contract/Articles of Association Amendment, Approval Certificate, Business License, Audit Report.
  • Special Requirements: Advertisement copy, Capital Reduction Explanation signed by the legal representative (including debt settlement commitment), Verification Report (copy).
  1. Compliance and Filing
  • If the capital reduction involves equity changes or state-owned assets, an assessment report and state-owned assets filing are required.
  • Foreign-invested enterprises need to file online through the Ministry of Commerce's "single window" and complete business registration changes simultaneously to ensure the information is complete and accurate.

III. Compliance Reminders

  • Tax Coordination Profit distribution and capital reduction must handle tax matters synchronously. For example, overseas investors enjoying deferred taxation need to fulfill declaration and filing procedures, while capital reduction requires verification of creditors' and debtors' rights and tax settlement.
  • Information Disclosure Capital reduction announcements must comply with the statutory time limit (45 days) to ensure the rights and interests of creditors; the filed information must be true and complete, avoiding false entries.
  • Policy Updates Pay attention to the latest regulations (such as Finance and Taxation [2018] No. 102, and the Ministry of Commerce Order No. 6 of 2024) to ensure that operations comply with current regulatory requirements.

 

Conclusion
Profit distribution and capital reduction for foreign-invested enterprises involve multiple compliance requirements related to taxation, legal affairs, and capital management. Enterprises need to combine their own type (joint venture/cooperative venture/wholly foreign-owned enterprise), follow legal procedures, properly handle financial distribution and creditor rights, and make good use of policy incentives (such as deferred taxation for reinvestment) to ensure operational compliance and flexibility. It is recommended to consult professional institutions in advance to avoid risks, protect shareholder rights, and ensure the sustainable development of the enterprise.
(Note: This information is based on current regulations. Specific operations should follow the latest policies and requirements of the competent authorities.)

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