How can a local subsidiary best be financed?
A foreign subsidiary can be financed either through loans or equity capital. In many circumstances loan capital may be more advantageous. This is the case if: 1. Interest on the loan capital is deductible, which it can be if the loan incurred reasonable interest n borrowings in relation to production and business operations. 2. Withholding tax on such interest payment is relatively low. 3. If the use of loan capital avoids capital duty or stamp tax.
A subsidiary can obtain a loan either through a local Chinese bank or through the parent company securing a loan from a bank outside of China and then on lending to the subsidiary. In this case the loan would need approval by the State administration of Foreign Exchange. Interest payments made to the parent company would be deductible to an amount considered "commercial.
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