Yiwu Business Owners Must Know: Why Borrowing from the Company and Not Repaying by Year-End Requires a 20% Dividend Tax?

At the end of the year, many Yiwu business owners will find that there is an 'other receivables - owner' item on the company's books, ranging from several hundred thousand to over a million CNY. They may not be able to clearly explain when the money was transferred out and what it was used for. Temporary transfers from the company account for purposes such as renewing stalls at the International Trade City, stocking up at Huangyuan Market, or live streaming inventory in Beixiazhu are very common in Yiwu.

However, there is an easily overlooked date: December 31. If a shareholder borrows money from the company and does not repay it by the end of the year and cannot prove that it was used for business operations, it is likely to be deemed a 'dividend' and subject to a 20% individual income tax. This is not a scare tactic; the policy is clearly stated.

I. What Does the Policy Specify? Three Conditions Must Be Met Simultaneously

The original text of Article 2 of the Notice on Regulating the Collection and Administration of Individual Income Tax for Personal Investors (CaiShui [2003] No. 158, 财税〔2003〕158号) states:

'If, within a tax year, a personal investor borrows money from their invested enterprise (excluding sole proprietorships and partnerships), and the borrowed amount is neither repaid nor used for the enterprise’s business operations by the end of the tax year, the unreimbursed loan can be treated as a dividend distribution to the personal investor, and shall be taxed under the 'interest, dividends, and bonus income' category.'

Breaking it down, the following three conditions must be met simultaneously:

• Borrower's Identity: The borrower must be a personal investor (shareholder) of the company, and the company must not be a sole proprietorship or partnership;
• Time of Borrowing: The borrowing must occur within a single tax year;
• Year-End Status: By the end of the tax year, the borrowed amount must neither be repaid nor used for the company’s business operations.

If all three conditions are met, the unreimbursed portion may be treated as a dividend distribution. According to Article 3 of the Individual Income Tax Law of the People's Republic of China, 'interest, dividends, and bonus income' is subject to a 20% proportional tax rate.

It is also important to note: the company does not need to have profits to be recognized as such. Even if the company is operating at a loss, if the shareholder has a long-term outstanding loan and the purpose of the loan is unclear, there is still a risk. The tax authorities look at the flow of funds and the year-end balance, not whether the company is profitable.

II. Let's Do the Math: How Much Tax Is Owed for a 1 Million CNY Unreimbursed Loan?

Assume that a shareholder of a certain trading company in Yiwu transferred 1 million CNY from the company account in 2026, recorded under 'other receivables - shareholder.' Different handling results in different outcomes:

If the company fails to withhold and pay this 200,000 CNY in tax, the trouble goes beyond just paying the back taxes:

• The tax authority recovers 200,000 CNY in taxes from the shareholders;
• The company, as the withholding agent, may be fined between 50% and 300% of the unpaid tax, which amounts to 100,000 to 600,000 CNY for failing to withhold the tax;
• From the date of arrears, a late payment surcharge of 0.05% per day is added. For 200,000 CNY in tax arrears over one year, the surcharge would be approximately 36,500 CNY.

Some business owners might ask: since the dividend rate is also 20%, what's the difference? The difference lies in that normal dividends are distributed after the company has made a profit and paid its corporate income tax, making the distribution clear; whereas, treating a loan as a dividend means the money is taken first and the tax is paid later, with the additional risk of late payment surcharges and fines. For the same 1 million CNY, the latter could cost tens of thousands more.

3. Four Common Pitfalls for Yiwu Business Owners

• "Transfer out for future use": Without a loan document or specified purpose, the amount remains listed under "other receivables" on the books, sometimes for two to three years, making it increasingly difficult to explain as time goes on.
• Borrowing for buying property, cars, or paying tuition: Using the funds for personal or family consumption unrelated to business operations makes it most likely to be labeled as a deemed dividend.
• Using personal bank accounts for transactions, recorded as shareholder loans: When the flow of funds does not match contracts, invoices, and logistics, it becomes unclear what the loan was used for, and this can lead to other issues.
• Repaying at year-end and borrowing again at the beginning of the next year: Using circular transfers to make a "formal repayment," where the year-end balance is zero, but the funds are actually continuously occupied by the shareholder, still poses a risk of being identified as such.

4. Four Steps to Self-Check Before Year-End

1. Review details: List the balances, occurrence dates, and ages of each item under "other receivables - shareholder/owner" to identify which are loans, advances, or petty cash.
2. Repay if possible: Transfer the funds back to the company account from the shareholder's personal account, noting "repayment of loan," and keep the bank receipt. Avoid using cash or making round-trip transfers on the same day.
3. Provide evidence for business use: Procurement contracts, invoices, payment receipts, inventory records, and payroll sheets that prove the funds were indeed used for business operations should be completed and filed separately.
4. Establish proper procedures: Loan documents should clearly state the purpose, amount, duration, and approver; petty cash should be cleared monthly; salaries should be processed through payroll, and dividends through the proper channels, to prevent "shareholder loans" from becoming an all-purpose category.

5. Frequently Asked Questions Q&A

Q1: Is it acceptable to repay on December 31 and borrow again on January 2?

The policy focuses on the end of the tax year. If the repayment is genuine and the year-end balance is zero, it does not formally constitute a cross-year loan. However, short-term cycling without a real source of repayment can easily be seen as a formality. It is recommended to truly repay and, if necessary, re-approve the loan in the following year.

Q2: If the borrowed money is used for purchasing goods or paying wages, is a 20% tax still required?

It is not considered a deemed dividend, but the claim of "used for business operations" must be supported by evidence. Contracts, invoices, payment records, and inventory logs should correspond, and the accounting should clearly distinguish between advance payments, petty cash, and shareholder loans, without mixing them up.

Q3: Does the 20% rule apply to loans by the owner of an individual business or a sole proprietorship?

The second clause of the Notice on Regulating the Collection and Administration of Individual Income Tax for Individual Investors (CaiShui [2003] No. 158) explicitly excludes sole proprietorships and partnerships. For these two types of entities, when the owner withdraws money, it is typically consolidated with business income and taxed at a rate of 5% to 35%, following a different logic. However, if there is no clear distinction between personal and company accounts, or if there are long-standing unsettled balances, they will also attract attention.

Q4: If the company already owes the boss money, does the boss taking it back count as a loan?

If the boss initially advances funds for the company's goods, rent, or expenses, and then retrieves the advance, this is considered repayment of an intercompany transaction, not a shareholder loan. The key is to retain evidence of the advance, reimbursement forms, and bank statements, and to account for it separately, not mixed in with 'shareholder loans' in the same account.

Q5: If identified, is it enough for the boss to just pay the additional tax?

No. The shareholder must pay the additional 20% individual income tax and late payment penalties; the company, as the withholding agent, may also face fines ranging from 0.5 to 3 times the amount that should have been withheld but was not. Proactively conducting self-inspections and making adjustments before the end of the year is generally more advantageous than dealing with issues after being audited.

Sources and References

• Article 2 of the Notice on Regulating the Collection and Administration of Individual Income Tax for Individual Investors (CaiShui [2003] No. 158), Guizhou Provincial Tax Service Policy and Regulations Database: Original Link
• Article 3 of the Individual Income Tax Law of the People's Republic of China: Interest, dividends, and bonus income are subject to a 20% proportional tax rate.
• Article 32 (late payment penalties) and Article 69 (penalties for withholding agents who fail to withhold) of the Tax Collection and Administration Law of the People's Republic of China.

With only two months left until the end of the year, it is recommended that Yiwu business owners now review the "Other Receivables - Shareholders" account, checking each item: repay what needs to be repaid, supplement any missing evidence, and process dividends where appropriate. Jinfan Tax & Finance is familiar with the actual financial situations of sellers in Yiwu International Trade City, Huangyuan Market, and Beixiazhu, and can help you conduct a special audit of shareholder transactions, keeping risks within 2026. If you need assistance, please contact Jinfan Tax & Finance (jfcs.com.cn).