FA
In recent years, the presence of Iranian companies in the Chinese market has grown significantly. From manufacturing activities and joint investments to trade in technical and engineering services, many Iranian enterprises are currently active in this country. However, one of the major challenges these companies face is the transfer of profits derived from their economic activities from China to Iran an issue directly affected by banking regulations, foreign exchange restrictions, and sanctions. This article examines the legal framework, operational obstacles, and lawful mechanisms governing the transfer of profits between the two countries.
Legal Framework for Profit Transfer in China and Iran
The transfer of profits by Iranian companies from China to Iran is not a simple financial transaction; it involves a set of legal requirements, foreign exchange regulations, and international restrictions whose strict observance is essential to prevent banking and legal risks. A comparative review of the two legal systems reveals that although both countries’ laws recognize the principle of free profit transfer for foreign investors, its implementation is severely constrained in practice by exchange controls and sanctions.
Foreign Exchange Regulations in China
China’s foreign exchange system is supervised by the State Administration of Foreign Exchange (SAFE), which controls the inflow and outflow of foreign capital, manages companies’ foreign currency accounts, and oversees international transactions.
Under current Chinese regulations, foreign enterprises may transfer net profits after taxes to their home countries provided that:
All corporate income tax and dividend tax liabilities have been fully discharged.
Annual financial statements have been audited by certified Chinese auditing institutions and submitted to the competent authorities.
Requests for profit remittance are made through licensed foreign exchange banks accompanied by supporting documents, such as investment contracts and tax payment certificates.
Moreover, pursuant to the Foreign Investment Law (2020), the Chinese government acknowledges the right of foreign investors to freely repatriate legitimate profits, capital gains, and other lawful income. Nevertheless, in practice, stringent exchange controls, transfer ceilings, and the requirement of SAFE’s authorization make the remittance process lengthy and complex.
In several provinces, banks are obliged to report all fund transfers involving countries classified as sanction risks including Iran to foreign exchange authorities, potentially causing delays or outright denial of transfer applications.
Banking and Foreign Exchange Regulations in Iran
In Iran, the repatriation of foreign currency and inflow of funds from overseas operations are regulated by the Central Bank of the Islamic Republic of Iran. According to the directives on repatriation of export proceeds and the Foreign Investment Promotion and Protection Act (FIPPA), Iranian entities are obliged to repatriate their foreign currency through the official banking system and to disclose the origin of funds transparently.
Key rules include:
Inflows must be executed through authorized banks or licensed exchange houses.
Profit payment to parent companies or foreign shareholders requires prior approval from the Ministry of Economic Affairs and Finance and clearance of all tax obligations.
If direct transfers are not feasible, the use of foreign earnings abroad requires a Central Bank permit.
In practice, sanctions-related banking restrictions and the disparity between official and market exchange rates delay transfers and increase costs. Furthermore, the absence of correspondent relationships between Iranian and Chinese banks prevents direct receipt of Chinese yuan (CNY), forcing companies to settle accounts through alternative currencies such as UAE dirham or euro.
Impact of Sanctions and International Restrictions
International financial sanctions are the most decisive factor limiting profit transfers between China and Iran. Since several Iranian financial institutions remain under the sanctions of the United States and the European Union, major Chinese banks including ICBC and Bank of China avoid direct engagement with Iranian entities to mitigate secondary sanction risks.
This situation leads to:
Near impossibility of using the SWIFT network for direct transfers;
The necessity of costly indirect routes via intermediary companies in third countries;
Heightened compliance scrutiny by Chinese banks on Iran-linked transactions.
Additionally, divergent monetary policies, exchange rate volatility, and recurrent regulatory changes in China (e.g., SAFE Circulars 19 and 16) create further operational uncertainty. Therefore, repatriating profits from China to Iran demands meticulous legal and financial planning, complete documentation, and professional advice in international economic law to avoid regulatory complications.
Principal Barriers to Profit Transfer from China to Iran
Despite its financial nature, profit transfer involves a complex array of banking, legal, foreign exchange, and administrative impediments in both countries. These obstacles slow fund movements, raise transaction costs, and may even result in blocked transfers.
Banking and Foreign Exchange Barriers
The most serious challenges arise from exchange controls and banking restrictions. Chinese banks, particularly after the intensification of secondary U.S. sanctions, refrain from direct financial relations with Iranian counterparts. Consequently, Iranian subsidiaries in China must channel their profits through intermediary countries such as the UAE, Turkey, or Malaysia.
China’s banking system also subjects transactions involving sanctioned jurisdictions to exhaustive scrutiny, requiring detailed documentation including contracts, invoices, customs declarations, and tax payment proofs. This bureaucratic process increases both cost and uncertainty. The lack of official clearing channels between Iranian and Chinese banks further eliminates any secure direct settlement route.
Legal and Administrative Obstacles
Foreign exchange outflows by foreign investors in China are contingent upon multiple approvals. Each profit transfer application must first pass local tax review to ensure full tax compliance, followed by SAFE authorization. This multi-tiered process, combined with frequent regulatory amendments, creates legal unpredictability. Local authorities’ varying interpretations of regulations across provinces further complicate consistency.
In Iran, similar administrative hurdles and foreign currency repatriation requirements may impede timely fund access.
Currency Conversion and International Transfer Issues
Converting Chinese yuan into freely transferable international currencies such as USD, EUR, or AED is another major challenge. Due to Iran’s inability to receive yuan directly, companies must first convert funds to a third currency and then reroute them to Iran. These multi-step conversions entail high transaction costs and exposure to exchange rate fluctuations.
Furthermore, the gap between Iran’s official and market exchange rates discourages formal remittances. Some companies, to avoid conversion losses, retain profits in China or use them for purchasing goods and services, which raises additional fiscal and legal concerns.
Financial Transparency and Compliance Challenges
Global banking standards require strict adherence to Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures. Given Iran’s elevated sanction risk profile, international and Chinese banks conduct enhanced due diligence on related transactions.
In many cases, even with complete documentation, banks may suspend or reject transfers pending verification of legitimacy and destination, causing significant delays. Recovering blocked funds through legal processes is often extremely difficult.
Additionally, any misclassification of transaction nature (e.g., mistaking profit remittance for trade payment) can result in fines or denials. Thus, accurate documentation, AML compliance, and expert legal consultation are vital.
Overall, these banking, legal, and compliance barriers necessitate careful planning, secure financial structuring, and continuous advisory oversight to minimize sanction and regulatory risks.
Lawful and Practical Solutions
Despite the obstacles, several lawful mechanisms exist within the regulatory frameworks of both countries and international economic law for profit repatriation.
Service or License Agreements
A legitimate and widely used method is conducting payments under service, consultancy, or license agreements. The Iranian entity in China may channel part of its profits to its parent company in Iran as remuneration for technical services, training, or intellectual property use. Under Chinese law and SAFE regulations, such payments are permissible if:
The contracts are duly registered;
The service valuation is supported by audit reports and commercial norms;
Payments are processed through official banks after tax clearance.
This strategy enables repatriation through authorized contractual payments rather than restricted direct profit transfers.
Use of Intermediary Companies in Third Countries
Establishing or employing Special Purpose Vehicles (SPVs) in financial hubs such as the UAE, Singapore, Hong Kong, or Malaysia is another efficient approach. These jurisdictions offer multi-currency accounts and more flexible banking systems for structured transactions. The Chinese subsidiary transfers profits to the intermediary’s account, and the SPV then remits funds to Iran or offsets them via intra-group settlements.
Compliance with Iranian investment laws (FIPPA) and AML standards in the intermediary country is necessary to ensure legality. This structure mitigates sanction exposure and enhances flexibility in managing foreign currency resources.
Investment Structure Design
At the investment planning stage, selecting an appropriate legal format for operations in China can facilitate future profit repatriation.
The two common investment forms are:
- Wholly Foreign-Owned Enterprises (WFOE)
- Joint Ventures (JV)
In a WFOE, the Iranian investor retains full ownership and can directly control dividend distribution and transfer. In contrast, a JV follows shareholder agreements that should, from inception, clearly stipulate profit transfer mechanisms, currency, and timing. Proactive contract design reduces disputes and prevents restrictive reinterpretations by authorities.
Arbitration and Specialized Legal Counsel
When disputes arise between Iranian and Chinese partners or authorities, recourse to international arbitration is the most reliable dispute resolution mechanism. Under the Arbitration Law of the People’s Republic of China and the 1958 New York Convention, arbitral awards issued by recognized institutions such as the Iran-China International Arbitration and Legal Center are enforceable in both jurisdictions.
Additionally, engaging specialized counsel in foreign investment and Chinese banking law helps avoid costly errors. Thorough compliance guidance and transaction documentation safeguard companies against transfer denials or alleged forex violations.
Role of Arbitration and Legal Services in Risk Mitigation
The Iran-China International Arbitration and Legal Center, as a specialized institution in international commercial and investment arbitration, plays a vital role in facilitating and supporting profit transfers between the two nations. Drawing on experts familiar with both legal and financial systems, the Center provides:
Legal advice on investment and fund transfer contracts;
Drafting and revision of service, license, and joint venture agreements;
Mediation and arbitration in financial disputes between Iranian and Chinese companies;
Practical strategies for regulatory compliance and sanction risk reduction.
Resorting to arbitration and professional legal counseling not only prevents conflicts and fund blockages but also ensures legal certainty and financial transparency, creating a secure and lawful framework for profit repatriation from China to Iran.
Conclusion
Transferring profits of Iranian companies from China to Iran is a complex, multidimensional process shaped by legal, banking, and political factors. Nevertheless, with transparent financial structuring, the use of compliant contractual mechanisms, intermediary entities, and specialized legal advisory, most of these challenges can be mitigated.
The Iran-China International Arbitration and Legal Center stands ready, through its expertise in international economic law, to offer practical and lawful strategies for the safe and compliant repatriation of Iranian enterprises’ profits from China to Iran.
