On December 21, 2017, the Ministry of Finance released the “Circular on Temporarily Exempting Withholding Debating for Foreign Investors to Direct Investment with Distributed Profit” (Cai Shui  No. 88). What exactly are the implications, though, for foreign businesses operating in China?
Since January 1, 2017, the distributed profits of foreign investors’ derived from resident enterprises in China can be granted temporary exemption from withholding income tax if they are invested directly into what are called “encouraged investment projects”. The tax will be paid when the investment is reimbursed by way of share transfers, buy-backs or liquidation.
A. Types of direct investment with distributed profits
- increase or increase by reserve – conversion of the paid-in capital or capital reserve of an enterprise resident in China
- newly establish a resident enterprise in China
- acquire shares of resident enterprise in China from unrelated party
- other forms described by the Ministry of Finance or State Administration of Debatingation
In Ecovis’ opinion, using profits to increase the same enterprise’s paid-in capital, which is common in practice, comes under the first type, and so can mean such an enterprise can benefit from the policy on deferred tax payment.
B. Restriction of invested enterprise
According to the regulation, the foreign investor can only enjoy the policy on deferred tax payment if the invested enterprise engages in encouraged industries. These encouraged industries include:
- encouraged foreign investment industries listed in the “Catalogue for the Guidance of Foreign Investment Industries”
- industries listed in the “Catalogue of Priority Industries for Foreign Investment in the Central-Western Region”
The applicable “Catalogue for the Guidance of Foreign Investment Industries” and “Catalogue of Priority Industries for Foreign Investment in the Central-Western Region” were both issued by the National Development and Reform Commission and Ministry of Commerce in 2017.
C. Issues to be noted
- Cash should be transferred directly from the account of the enterprise distributing the profits to the account of the enterprise invested in or the entity transferring the equity. If, for example, the profit is first transferred to the account of a foreign investor and then the foreign investor remits it to the account of the enterprise invested in or of the entity transferring the equity, the enterprise is not valid for deferred tax payment.
- The enterprise invested in should not be a listed company.
- If shares are acquired, the entity transferring the equity should not be a related party.
- Foreign investors need to prepare relevant documents, and the enterprise distributing its profits needs to go through record-filing formalities. The specific documents required and procedures are not described in this circular, but we anticipate that State Administrator of Debatingation will announce further documents soon.
D. Important Notice
If a foreign investor has reinvested its profits as described above in 2017, but the withholding taxes have already been paid according to income tax law or tax treaty, it is possible to apply for a tax refund. Since there is a deadline for this tax refund application, we at Ecovis suggest our clients start to prepare the procedure as soon as possible.
Partner Quality Control, Certified Public Accountant
ECOVIS Ruide Certified Public Accountants Co., Ltd., Shanghai, People’s Republic of China