Foreign shareholder loan practice in China

published on 20 June 2025 | reading time approx. 3 minutes

Many foreign invested enterprises would like to finance their Chinese subsidiaries with shareholder loans, in particular for those who might not be eligible for local bank loans. Due to Chinese strict foreign exchange control, foreign shareholder loans in China are sometimes more complicated than expected especially for those who apply for foreign shareholder loan in China at first time.

This article will briefly introduce an overview of the regulatory framework and practical issues to be noticed in foreign shareholder loan practice in China.

Foreign Loan Registration

In China, foreign shareholder loan must be registered at the State Administration of Foreign Exchange (“SAFE”) as a mandatory obligation. Such registration may take 1-2 months or even longer depending on local practice, therefore early preparation and communication with the respective bank for loan account is highly recommended.

Foreign Loan Quota

Currently there are two loan limits schemes for the foreign-invested companies to apply for shareholder loans:

According to the previous and still applicable legislation, foreign-invested companies can take out a shareholder loan in an amount equal to the difference between its total investment amount and the registered capital (the so-called borrowing gap mode). Under this mode, if the registered capital is not significant, the financing amount limit from shareholder loan will be rather limited.
Alternatively, there is another mode, so-called net-assets mode. To encourage enterprises with limited registered capital to borrow more loans from overseas lenders, this mode defines that the maximal amount of foreign loan can be 3.5 times of its net assets according to the latest regulation. Please note that due to foreign currency control, the index of calculation might vary from time to time, and the latest update was beginning of 2025 with effective date from January 2025 on and may change in the future depending on the announcement of the SAFE. Hereby the net assets usually refer to the audit report balance of last financial year, which will be reviewed by the local bank.

Special Notice

High-Technology enterprises and companies located in Pilot Free Trade Zone might be eligible to a more favorable and flexible foreign loan limit.

Interest Rates Setting

For the shareholder loan, transfer pricing regulations apply. Interest rates must reflect the market rates and be arranged at arm’s length principle. If the debt exceeds 2:1 debt-to-equity ratio, excess interest might not be tax deductible for corporate income tax.

Tax Implications

The interest income is subject to 6 percent of VAT and 10 percent of withholding income tax for German shareholder loan. The 6 percent of VAT paid on interest is not creditable for the Chinese borrower under current valid VAT regulation and shall be treated as financing cost.

Under the Chinese new VAT Law to be effective from 2026 on, one of the key updates is that the input VAT paid on loan interest may be creditable. More detailed implementation and grandfathering rules are to be expected by the end of 2025.

Our Recommendation

Compliance is important with regard to foreign invested companies in China. The formal registration at the SAFE is mandatory for foreign loans. Furthermore, a suitable foreign loan limit model shall be selected and the shareholder loan interest rate shall be set at fair market value. For certain shareholder loan interest rates obviously higher than LPR interest, it is suggested to prepare a benchmarking study and internal documentation to avoid further challenges from transfer pricing perspective.

For companies to launch foreign shareholder loans from 2026 on, it shall closely monitor the new VAT law implementation on the 6 percent of VAT tax creditability.

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