SAT Clarifies Details And Procedural Requirements To Exempt Foreign Investment Return From Withholding Tax

; posted on
January 10th, 2018

The State Administration of Taxation (SAT) issued an announcement (SAT [2018] No.3) clarifying the executive issues on the Circular (Cai Shui [2017] 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.

Circular Cai Shui [2017] No.88

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:

  • Re-investments with distributed profits must be direct investments in the form of increasing the capital or capital reserve of the existing resident company, the establishment of a new enterprise, and the acquisition of the shares of a Chinese enterprise from a non-related party;
  • Profits which have been distributed to foreign investors should actually be characterized as dividends and profits derived from equity investment;
  • Re-investment made in cash must be transferred directly from the foreign investor's bank account into the invested enterprise's bank account; direct investment made in this manner should be transferred directly from to the invested enterprise without being held (temporarily) by other persons;
  • Re-investment should be identified under the encouraged categories of "Catalogue for Guidance of Foreign Investment Industries" or "Industrial Catalogue of Foreign Investment in the Middle and Western Regions".

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.

Announcement SAT [2018] No.3

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.

Sources: State Administration of Taxation, Ministry of Finance

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