New Tax Policy to Encourage Profit Reinvestment by Foreign Investors

On June 30, the Ministry of Finance, the State Taxation Administration, and the Ministry of Commerce jointly issued the “Announcement on the Tax Credit Policy for Direct Investment with Distributed Profits by Overseas Investors.” The policy, effective from January 1, 2025, to December 31, 2028, stipulates that overseas investors who use profits distributed by Chinese resident enterprises for direct investment in China may be eligible for tax credits, provided specific conditions are met.

The announcement reflects growing reinvestment activity by foreign enterprises in China, driven by deeper integration into the domestic economy. A similar policy was introduced in 2017 to temporarily exempt such investments from withholding income tax. Under the current policy, qualified overseas investors may receive a 10% tax credit based on their investment amount, with the possibility to carry forward unused portions. If the applicable tax rate for dividends or similar income under a tax treaty is lower than 10%, the treaty rate will apply.

To qualify for the tax credit, the reinvestment must consist of actual distributed profits from resident enterprises and be used for equity investments such as capital increases, new establishments, or equity acquisitions, excluding transactions involving listed company shares unless they qualify as strategic investments. The invested enterprises must operate in industries listed in the “Catalogue of Industries Encouraged for Foreign Investment.” The reinvested equity must be held continuously for no less than five years, and the investment must be made directly using cash or eligible non-cash assets, transferred directly from the distributing enterprise without intermediary accounts or holders.

The policy also outlines that if the investor recovers all or part of the investment after five years, the deferred tax must be declared and paid within seven days, and any remaining tax credit can be applied. If the investment is withdrawn before the five-year threshold, the tax benefit is deemed invalid, and the deferred taxes must be paid in full, with the tax credit reduced accordingly.
Foreign investors must provide documentation proving compliance with the policy, as required by tax authorities. The relevant commerce departments will coordinate with other agencies to oversee reinvestment activities, and if an investor is later found non-compliant, the tax credit will be revoked, and taxes will be recovered in cooperation with the tax authorities