Dividends withdrawn from the company's capital contributions is prohibited in China.
Any capital reduction shall be agreed by the board of shareholders and shareholders' resolutions shall be passed. However, capital reduction shall not be conducted for the purpose of dividends.
At Horizons, we encounter many cases of indirect illegal dividends distribution, where the overseas headquarters are not alert to the legal obligations before dividends are distributed. Hence, understanding and implementing the correct dividend distribution is a must for any headquarters with a Chinese subsidiary. In the below, we provide five takeaways for dividend distribution.
First Offset Losses
Shareholder dividend shall be drawn from the after-tax profits for the current financial year. The company is required to firstly offset any losses if the company's statutory common reserve is insufficient to cover losses of the previous year.
Second Withdrawn for Statutory Common Reserve
Secondly, the company shallwithdraw10% of company profitsas the company's statutory common reserve, although a company with an aggregate common reserve ofmore than 50% of the company's registered capitalmay elect not to draw any statutory common reserve anymore. The board of shareholders may also pass a resolution to withdraw funds for discretionary reserve.
Common Reserves
The company's common reserves are mandated to cover losses made in past years, enhance the company's productivity and expand business or to increase the registered capital.
If the statutory common reserve is converted into capital, the value of the remaining common reserve shall be no less than 25% of the company's registered capital prior to the conversion.
Penalties
Any company that fails to draw a statutory common reserve in accordance with the Law shall be ordered by the finance department of the people's government at the county level or above to draw the required amount andmay be fined up to CNY200,000.
Lastly Divide According to Capital Contribution
The remaining after-tax profits will be distributed to shareholders according to their actual capital contribution. If the company fails to cover losses and withdraw the statutory common reserve, the profits distributed must be returned to the company. No profits may be distributed for shares held by the company itself.
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.