China Statutory Reserve Fund Requirements Explained for Foreign Companies
Foreign investors who set up a WFOE with a straightforward plan to distribute profit each year are often surprised, the first time they actually try to pay a dividend, to learn that not all of the company's after tax profit is available for distribution. Chinese company law requires every foreign invested enterprise to set aside a portion of its profit into a statutory reserve fund before anything can be paid out to shareholders.
How the calculation works
The requirement is to allocate at least 10 percent of after tax profit to the statutory reserve fund each year, continuing until the accumulated balance of the fund reaches 50 percent of the company's registered capital. Once that threshold is reached, the annual allocation requirement stops, and future profit becomes fully available for distribution, subject to the other conditions described below.
Only after this allocation has been made, and after any losses carried forward from prior years have been made good, does the remaining balance become distributable profit. A company cannot skip the reserve fund allocation in a particular year simply because the shareholders would rather receive the full amount as a dividend.
Why the rule exists
The statutory reserve fund functions as a built in creditor protection buffer, ensuring that a company retains a base level of capital inside the business rather than distributing everything to shareholders as soon as it is earned. It sits alongside, and is distinct from, any additional voluntary reserves a company might choose to set aside for its own planning purposes.
Building it into repatriation planning
For companies planning their first dividend distribution, or projecting how much cash can realistically be repatriated from China each year, the statutory reserve fund needs to be factored into the calculation from the outset, alongside the completed annual audit, the settled tax position, and the withholding tax due on the amount actually distributed. Treating the reserve fund requirement as a late surprise rather than a planning input is one of the more common and avoidable causes of delay when a foreign shareholder is expecting a dividend on a particular timeline. New to China or ready to switch? Whether you are setting up a new China company or moving away from your current provider, Woodburn makes the process clear, compliant and straightforward.
Why Woodburn?
With 30+ years’ experience, Woodburn supports international businesses setting up and operating across Hong Kong and China.
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