Requirement for capital contribution
1. Capital reserve funds are set aside on the basis of 10% of the after-tax profits. When it accumulates to the level equal to 50% of the registered capital, the company can stop setting aside the capital reserve funds. When the company has incurred a loss, the profit for the year should first be used to make up for the losses incurred during previous years.
2. The PRC law requires the directors to transfer 5% of the after-tax profit to the staff provident funds, which are wholly set aside for the welfare of the company staff, such as building staff quarters, nurseries, and the barber's shops.
3. After the appropriation of the capital reserve and staff provident funds, the directors can allocate the profits to discretionary capital reserve funds.
4. The directors can declare dividends from the retained earnings after the appropriation of those funds, as mentioned above.
Declaration of dividend
The board of directors should pass a resolution for the distribution of dividends after fulfilling the statutory obligation toward the two provident funds. To remit the dividends outside China, the PRC Company should obtain the "income tax payment certificate" or "income tax exemption certificate" issued by the local branches of the tax department, as well as the capital examination and audited report issued by China CPA firms. Note that PRC tax law does not impose income tax on the dividends distributed by the foreign investment enterprises to the foreign shareholders. As from 2008, foreign company that receives dividends from China is subject to income tax at 10% (5% for Hong Kong and Singapore companies). Please refer to 'Taxation of foreign companies'.