China: Distributed profits generated from resident enterprises of China and directly invested in encouraged investment projects by foreign investors after 1st January 2017 are temporarily exempted from withholding tax

The Chinese government has successively issued documents such as the Notice Regarding Measures on Promoting the Growth of Foreign Capital in China (Guofa [2017] No.39), the Notice Regarding the Provisional Deferral Treatment for Withholding Tax on Direct Re-investment by Foreign Investors Using Profits Distributed from Tax Resident Enterprises in China (Caishui [2017] No.88), and the Announcement Regarding the Execution of Provisional Deferral Treatment for Withholding Tax on Direct Re-investment by Foreign Investors Using Profits Distributed from Tax Resident Enterprises in China(SAT[2018] No.3) since 2017 to clarify that distributed profits generated from resident enterprises of China and directly invested in encouraged investment projects by foreign investors after 1st January 2017 are temporarily exempted from withholding tax, for the sake of further utilizing foreign capital actively, promoting foreign capital growth, increasing foreign capital quality and encouraging sustaining expansion of foreign investment in China.

Foreign investors who are not subject to withholding tax must satisfy the following conditions simultaneously: 

1. Invest directly, which includes equity investment by foreign investors in the form of capital increase, new establishment and equity acquisition with distributed profits. However, increase，transfer or purchase of shares of listed companies are not included (except qualified strategic investment); 

2. The nature of the distributed profits that foreign investors received should be income from equity investment such as stock dividends and bonus, which are derived from retained earnings realized by resident enterprises, including retained undistributed profits from previous years; 

3. Investment capital (assets) must be transferred directly to the investee’s or equity transferor’s account, intermediate turnover is not permitted; 

4. The scope of encouraged projects refers to the list of industries enumerated in the Catalog of Industries for Encouraging Foreign Investment or the Catalog of Advantageous Industries for Foreign Investment in Central and Western Regions.

It is important to note that there are clauses stipulated in the documents above that: if foreign investors de facto recoup direct investment entitled to withholding tax deferral treatment through equity transfer, repurchase and liquidation, etc., deferral tax should be declared according to prescribed procedures within 7 days after receiving corresponding payments.

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