Knowledge & Opinions
05 Feb 2019

China: Tax benefits to overseas investors reinvesting distributed profits expanded

For the purposes of further encouraging overseas investors to invest in China, the Ministry of Finance, the State Administration of Taxation, the National Development and Reform Commission and the Ministry of Commerce recently issued the Circular about Expanding the Scope of Application of temporary waiver for Withholding Income Tax on Direct Investments with Distributed Profits by Overseas Investors (Cai Shui [2018] No. 102). Compared with the previous policy of Cai Shui [2017] No. 88, the scope of application of withholding income tax for foreign investors has been expanded with other provisions remain the same. MSI's Chinese accounting member Lehman Brown Ltd. provides further information.

Main point: According to the circular, the favorable tax policy will be expanded to all non-restricted foreign investment projects and sectors from encouraged foreign investment projects. 1. An overseas investor not subject to withholding of income tax in the interim shall satisfy all the following criteria 1.1. Direct investments, this specifically refers to:
  • Increase or conversion of paid-up capital or capital reserve of a domestic resident enterprise in China;
  • Investment and establishment of a new domestic resident enterprise in China;
  • Acquisition of the equity of a domestic resident enterprise in China from a non-related party;
  • Any other method stipulated by the Ministry of Finance and the State Administration of Taxation. Enterprises invested by overseas investors via the aforesaid methods shall be referred collectively as investee enterprises.
It is worth noting that the notice excludes two cases of direct investment from the scope of this policy: one is new subscription, transfer or acquisition of shares in listed companies (except for eligible strategic investments). The second is to acquire equity from related parties. 1.2. The profits received by foreign investors belong to the real distribution of the realized equity investment income. 1.3. The profits used for direct investments shall not be circulated among other domestic or overseas accounts prior to making direct investments. 2. Tax filing requirements Where an overseas investor satisfies the criteria stipulated in Article 2 of this Notice, it shall make a declaration in accordance with the requirements for administration of tax collection, and provide materials to the profit-distributing enterprise to show that the overseas investor has satisfied the policy criteria. Where the profit-distributing enterprise concludes, upon examination and verification, that the overseas investor has complied with the provisions of this Notice, the profit-distributing enterprise does not need to withhold income tax pursuant to the provisions of Article 37 of the Enterprise Income Tax Law, and shall perform filing formalities with the tax authorities in charge. Where an overseas investor has enjoyed the temporary waiver for withholding income tax as stipulated in this Notice, if the tax authorities find in the follow-up administration that an overseas investor does not satisfy the stipulated criteria, except where the profit-distributing enterprise is held liable, the overseas investor shall be deemed to have failed to declare and pay enterprise income tax pursuant to the provisions, the overseas investor's liability for late tax payment shall be pursued in accordance with the law, and the period of tax arrears shall be computed with effect from the date of payment of the relevant profits. 3. Special cases 3.1. Qualified overseas investors but have not enjoyed any policy benefits If overseas investors have not enjoyed any policy benefits, they can apply to receive tax benefits within three years and get tax refund for tax payments they have already made. 3.2. Withdrawal of direct investments which it has enjoyed the policy benefits If an overseas investor recovers, through equity transfer, buyback, liquidation etc, direct investments for which it has claimed temporary waiver for withholding of income tax, it shall declare and make retrospective tax payment to the tax authorities pursuant to the stipulated procedures, within seven days from actual collection of the relevant monies. 4. Commencement date This Notice is being implemented with effect from 1st January 2018. This Notice may apply to equity investment gains such as dividends, bonuses etc derived by overseas investors after 1st January 2018 (including 1st January 2018), and tax paid shall be refund pursuant to the provisions of qualified overseas investors but have not enjoyed any policy benefits. The aim of the new policy is to encourage foreign companies to reinvest their profits into China, in order to benefit the economy, jobs creation and to stem outflow of foreign exchange.

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