China 2025: Key Insights on the Reinvestment Tax Credit Policy

The Announcement clearly stipulates that foreign investors can enjoy tax credits when using profits distributed by Chinese resident enterprises for eligible domestic reinvestments. The specific provisions are as follows:

The policy is effective from January 1, 2025, to December 31, 2028. Investments made from January 1, 2025, until the date of the Announcement's issuance that meet the outlined conditions are eligible for retroactive tax credit claims.

10% of the foreign investor’s domestic investment can be used to offset the tax liability for the current year. Any unused credit may be carried forward to future years. Even if there is a remaining credit balance after December 31, 2028 (the end date of the policy), the tax credit can still be applied.

It is important to note that the “tax liability” eligible for tax credit refers to enterprise income tax on income such as dividends, interest, and royalties, as defined in Article 3, Paragraph 3 of the Enterprise Income Tax Law, received by foreign investors from the profit-distributing enterprise after the reinvestment. If the income type or timing does not meet these conditions, the tax credit will not apply.

If the tax treaty rate applicable to the foreign investor is lower than 10%, the treaty rate will apply.

The profits distributed to foreign investors must be equity investment income, such as dividends or bonuses, derived from the retained earnings actually distributed by Chinese resident enterprises.

This includes equity-based investments such as capital increases, new company formations, and equity acquisitions. However, it does not include investments in listed companies (except for eligible strategic investments). Specifically, it refers to:

• Increasing or converting into the paid-in capital or capital surplus of Chinese resident enterprises;

• Investing in the establishment of new resident enterprises in China;

• Acquiring equity of Chinese resident enterprises from non-affiliated parties.

The reinvestment must fall within the scope of the Catalog of Industries Encouraged for Foreign Investment (available on the official website of China’s National Development and Reform Commission, or contact the author of this article for further details).

Foreign investors must hold the investment for a continuous period of at least 5 years.

The reinvestment funds, whether in cash, in-kind, or securities, must be directly transferred from the profit-distributing enterprise to the invested enterprise or equity transferor. The use of third parties to intermediate or hold the funds is not allowed, in order to avoid potential tax compliance issues.

Foreign investors must provide relevant documentation to demonstrate their compliance with the tax credit policy and file a declaration with the tax authorities through the profit-distributing enterprise.

The profit-distributing enterprise is permitted to temporarily defer the withholding of the enterprise income tax on reinvested profits. Later, when the income is paid to the foreign investor, the tax offset will be declared to the tax authorities.

Foreign investors shall also submit relevant investment details via the Ministry of Commerce's designated platform, through the invested enterprise.

If a foreign investor recovers their investment after holding it for 5 years, any deferred taxes on the corresponding profits distributed by the Chinese resident enterprise shall be declared and paid within seven days of the investment recovery.Any unused balance of the reinvestment tax credit may be applied to offset the taxes payable upon recovery.

If the investment is recovered within 5 years, in addition to repaying the aforementioned taxes, the foreign investor’s tax credit entitlement will be reduced on a pro-rata basis. If the utilized tax credit exceeds the adjusted entitlement, the foreign investor must repay the excess within seven days of the investment recovery.

The Announcement introduces a significant tax incentive for foreign investors, enabling them to enjoy tax credits through the reinvestment of distributed profits. By leveraging this policy, foreign-invested enterprises can optimize their tax liabilities, enhance the flexibility of capital operations, and gain a more competitive position in the Chinese market. However, it is crucial for all parties to closely monitor any further tax regulations and compliance requirements during the policy’s implementation to ensure full utilization of the available tax benefits.