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China Extends Withholding Tax Deferral Eligibility for Foreign Investors

The State Administration of Taxation (SAT) has extended the criteria under which investors can benefit from tax deferral policies. In particular, greater leeway is to be given to the use of mainland-generated profits to pay capital contributions or for reinvestment.

Details of the changes were revealed in the Circular on Expanding the Scope of Withholding Tax Deferral on Direct Investment of Foreign Investors Using Distributable Profits (Cai Shui No.102 [2018]). This specified that the eligibility for withholding tax deferral for mainland direct investments by foreign investors using distributable profits from tax-resident enterprises will be extended to all projects and all sectors not on the prohibited list.  

In terms of specifics, two particular areas were highlighted:

  • When a foreign investor uses distributable profits to pay the capital contribution subscribed as a resident enterprise shareholder, this will be deemed “an increase or conversion of paid-up capital or capital reserve of a resident enterprise within the territory of China”. The investor is then eligible for tax deferral as long as all other regulatory requirements have been complied with.
  • When a foreign investor transfers funds from a special deposit account for renminbi reinvestment, in accordance with the regulations of the relevant financial authorities, the case will be deemed to comply with the requirement that the relevant profits “cannot be transferred to other accounts at home or abroad before direct investment” under certain conditions. These include the foreign investor having to transfer the relevant sum from the special deposit account for renminbi reinvestment to the invested enterprise or equity transferrer on the same day that the sum is transferred from the profit distributing enterprise account to the special renminbi reinvestment deposit account.

For further details, please access the following links:

Announcement of SAT on Expanding the Scope of Withholding Tax Deferral on Direct Investment of Foreign Investors Using Distributable Profits (SAT Announcement No. 53 [2018]) (in Chinese)

China Broadens Eligibility for Withholding Tax Deferrals by Foreign Reinvestors

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