Equity & Loand from foreign mother company in China

To send money for your company in China on a registered bank account it is needed to have a permission. If your investment is smaller than 2 MM USD you would probably be pushed for 30/70 ratio, where 70% is a loan and 30% has to be in form of equity.

What does it mean in reality I

In reality it means that every 70 from your 100 has to be frozen in China for very long, will a big probability till u will stay in China with your company. This money is frozen and even they will earn money, you will need to pay
a) income tax
b) dividend tax
c) extra fee for a SAFE to get allowance to withdraw the money from China
d) be audited

This everything can pile to 50%. And it is even harder, as you will many times get an offer to rent an office without tax for 10, with tax for 12 plus a rolling eyes and push by local people why u want to pay tax. So in the end u decide to pay 10 but without invoice. I would need to look deeper in the issue, as it seems that supplier is just moving his/hers tax burden from him/her to you. That would be ok and it will avoid your problems with tax office, accounting and monitoring of costs. On the other side it creates additional problem with cash flow and logically the local management will push you to accept no invoice costs.

What does it mean in reality II

It means that on 70% of the money you will need to grow your business in China u will need to pay 50% additional tax, so u will need to earn 105 just to get your 70 and be on black zero.

This means that China is pushing for:
a) low inflow of foreign money to China, as it will be cheaper to finance your company from Chinese money
b) harder life for foreigners as it hopes the money can stay in China even it will no be properly taxed
c) investments in low development costs project. projects with big R&D costs need investments in years to get it's returns and than they will be highly taxed.

On the rest 30%, provided as a loan you will need to get permission by SAFE too to withdraw them. SAFE will follow up and give you the guidelines when u can withdraw and how. For sure they would like to see following:
1. if you received the loan before u have to invest it. and only if investment is successful u can pay money back. In other words u would need to pay income tax and withdrawal tax for this 30%. Costs for this might also reach 40% and it shall be easier to get money back. I am afraid that in the end there is no big difference between a loan obtained from another country or equity. Only that loan may with withdrawn quickly and little cheaper.

This makes enterprising in China harder for foreigners. Also it gives additional advantage to local people and therefore decrease the pressure of effectivity.