China’s relevant tax regulations stipulate that the ratio of thin capitalization (i.e. debt-to-equity ratio) is 2:1

First, when “going global” enterprises register construction companies overseas (such as project companies or Subsidiaries), their registered capital is too small, and most of them only meet the minimum capital requirements of the host country’s company law for registered companies. For example, the registered capital is only tens of thousands of dollars, which is often compared with the amount of large-scale projects implemented in the host country. There is a complete mismatch in the minimum capital flow for operations, and "going global" companies make this minimum registered capital arrangement mainly to save cash flow for early start-up projects, and to isolate limited liability risks in the host country based on capital. .

Second, because overseas construction projects often involve large amounts, local owners in the host country cannot pay in time, and periodic project payment arrears often occur. In order to ensure the construction period and construction efficiency, China Group headquarters often arranges internal Borrowing, that is, periodic advance funds to overseas construction companies, has caused the problem of capital weakening because the registered capital is too small and the Chinese headquarters has advanced more and more funds.

Due to thin capitalization, the asset-debt ratio of overseas construction companies exceeds the thin capitalization ratio stipulated by the local tax regulations of the host country. Therefore, for the advance capital (loan) of the Chinese group headquarters, the overseas construction company cannot transfer the excess portion. Interest expenses are deducted before corporate income tax, resulting in overpayment of income tax. Some overseas construction companies purchase equipment and building materials from China, and the China Group Headquarters advances the funds. Subsequently, the advance funds for the purchase cannot even be entered into the overseas company's external account, and the interest on the related advance becomes a cost expense in the overseas company's external account. The "hard gap" inflated local profits, thereby overpaying corporate income tax.

Loans granted by China-headquartered groups to their overseas construction companies often fail to register foreign debt with the host country’s central bank or foreign exchange management agency in time due to time constraints or cumbersome relevant approval procedures in the host country. Some developing countries implement strict foreign exchange controls and have limited foreign exchange quotas. Since foreign debt registration has not been done in advance, overseas construction companies cannot make normal principal and interest payments on the loans borrowed from the China Group Headquarters, that is, they cannot apply for corresponding foreign exchange quotas in the host country and then make overseas foreign exchange payments. Originally, it was more difficult for "going global" construction companies to convert the local currency of their operating results into international hard currencies (such as US dollars, euros, etc.) in the host country and then remit them back to China. After normal foreign debt registration, repayment of principal and interest is a legal and common way to exchange foreign currency for remittance, and my country has signed bilateral tax treaties with 111 countries. According to the tax treaties, overseas construction companies can enjoy preferential tax rates when paying interest. Generally, The preferential withholding tax rate on interest payments is between 5% and 15%. In contrast, the corporate income tax in the host country is generally between 20% and 30%. In addition to the withholding income tax on dividend payments, even dividends can enjoy the same preferential tax rate in bilateral tax treaties, which is generally between 5 and 5%. % to 15%. Adding the two together, the tax rate is as high as 25% to 35%. In other words, for the same overseas earnings to be repatriated to China, it is more convenient for overseas construction companies to repay principal and interest than to pay dividends through after-tax profits, and the tax burden is also lighter. It is a pity that overseas construction companies have lost the means to repay principal and interest due to failure to register foreign debts in a timely manner, and should be taken as a warning.

Legal Basis

Enterprise Income Tax Law

Article 56: Enterprise income tax paid in accordance with this law shall be calculated in RMB. If the income is calculated in a currency other than RMB, it shall be converted into RMB, calculated and tax paid.

Article 57: Enterprises that have been approved to be established before the promulgation of this law and enjoy low tax rates in accordance with the tax laws and administrative regulations at that time can, in accordance with the provisions of the State Council, within five years after the implementation of this law. , gradually transition to the tax rate stipulated in this law; those who enjoy regular tax reduction and exemption, according to the provisions of the State Council, can continue to enjoy it after the implementation of this law until the expiration, but if they have not yet enjoyed the preferential treatment because they have not made a profit, the preferential period shall be from this law Calculated from the year of implementation.

Newly established high-tech enterprises that need to be supported by the state in specific regions that are legally established to develop foreign economic cooperation and technological exchanges, as well as in regions where the State Council has stipulated the implementation of special policies for the above-mentioned regions, can enjoy transitional benefits. Tax incentives, specific measures shall be stipulated by the State Council.

Other encouraged enterprises determined by the state can enjoy tax reductions and exemptions in accordance with the provisions of the State Council.