The State Administration of Taxation (SAT) issued an announcement (SAT  No.3) clarifying the executive issues on the Circular (Cai Shui  No.88), that concern temporarily exempting dividends and profits distributed by resident enterprises to foreign investors from withholding tax if the amount distributed is used for re-investment in China directly. The Circular was jointly issued by the Ministry of Finance, State Administration of Taxation, National Development and Reform Commission and Ministry of Commerce on December 21, 2017.
In order to boost foreign investment, dividends and profits received by foreign investors from Chinese resident enterprises are entitled to defer the tax payment and be temporarily exempted from withholding tax if the distributed profits are used for re-investment in encouraged fields in China. Following requirements have to be fulfilled simultaneously to apply the exemption rules:
The favorable rules are applicable to dividends distributed on or after January 1, 2017 and the withholding tax paid on distributions on or after January 1, 2017 may be refunded.
The Announcement clarified that operating activities relating to encouraged categories under the Circular include the production of goods or supply of service, research and development activities, investment in construction projects or equipment procurement, and other activities concerned. In cases where foreign investors must recover deferred tax due on the transfer or disposal of direct investment, beneficiary treatment under bilateral tax treaty may be granted if any favorable tax treatment could be given when the profit used for re-investment was distributed. Other procedural rules and documentation requirements were presented in the announcement as well.
With the fast growth of China’s economy and the continuous improvement of the comprehensive strength of domestic enterprises, as well as the implementation of the “One Belt, One Road” policy, an increasing amount of Chinese enterprises are beginning to expand their global footprint and establish their presence in Europe.
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