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Provisional Exemption from Withholding Tax

Overseas investors are to be incentivised to reinvest in China via a number of newly-introduced advantageous tax policies. More specifically, should an overseas investor choose to directly reinvest the profits from a business deemed to be tax resident in China into an investment project under the encouraged category, they will be entitled to apply for tax deferral and be provisionally exempt from any pending withholding tax obligations.

These exemptions, however, only apply in instances where a certain number of pre-conditions are met, including:

  • The profits in question need to be directly reinvested in an acceptable form of equity investment, including capital increases, the establishment of new entities and the acquisition of shares in existing entities. The exemptions, however, will not apply in all instances where the said profits are used to increase capital, convert share capital or acquire shares with relation to listed companies
  • The profits in question need to have been generated as a dividend, bonus or other equity investment return and distributed by a tax resident enterprise from realised retained earnings
  • In this instance, “investment projects under the encouraged category” are deemed to be projects that fall within the sectors legally-sanctioned for foreign investment during the relevant period, including those projects listed in the Catalogue for the Guidance of the Foreign Investment Industries and the Catalogue of Priority Industries for Foreign Investment in the Central and Western Regions

These incentives were announced by the Ministry of Finance, the State Administration of Taxation, the National Development and Reform Commission and the Ministry of Commerce in a jointly-issued circular Notice of the State Council on Several Measures for Promoting the Growth of Foreign Investment – and came into retroactive effect as of 1 January 2017.

For further details (in Chinese), please refer to the following link:

Notice on the Policy of Provisional Withholding Tax Deferral Treatment for Foreign Investors’ Profits Used in Direct Re-investment

 

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