China Expands The Scope Of Withholding Tax Relief On Dividends Of Foreign Investors Used For Direct Investment

; posted on
October 2nd, 2018

Chinese State Administration of Taxation (SAT) issued a circular (Circular Cai Shui [2018] No. 102) on 29 September 2018. This circular is retroactively applicable to dividends, bonuses and other equity investment gains received by foreign investors on or after 1 January 2018 and the Circular Cai Shui [2017] No. 88 is simultaneously abolished.

Applicable Scope and Condition

The circular clarifies the tax deferral regime for withholding tax on dividends and distributed profits reinvested into directive investment. The application scope of this tax incentive is extended from the foreign investment projects under the encouraged category to all non-prohibited foreign investment projects and fields.

To enjoy the deferral of withholding tax, foreign investors must meet all the following conditions:

  1. Engage in direct investment in terms of profit-sharing, including equity investment activities such as capital increase, new construction, and equity acquisition by overseas investors, but does not include new, transferred or acquired shares of listed companies. (Except for eligible strategic investments).
  2. The distributed profits are dividends, bonus or other equity investment gains formed by the realized retained earnings of Chinese domestic resident enterprises.
  3. If the direct investment is paid by cash, such funds shall be transferred directly from the account of the Chinese profit distribution enterprise to the account of the enterprise to be invested or the equity transferor. Turn-over in other accounts at home or abroad is not allowed. If it is paid in kinds or securities, the ownership shall be transferred directly from the Chinese profit distribution enterprise to the enterprise to be invested or the equity transferor.

Other Terms

The “foreign investors” are the non-resident enterprises that are subject to the provisions of Article 3, paragraph 3 of the Chinese Enterprise Income Tax Law. The term “Chinese domestic resident enterprises” as used in this circular refers to the resident enterprises established under the laws of China.

If a foreign investor who is entitled to this tax incentive but has not actually enjoyed it, it may apply for the recovery and enjoy the policy within 3 years from the date of actual payment of the relevant tax, and refund the paid tax.

Foreign investors who have enjoyed such tax deferral and actually recover the direct investment through equity transfer, repurchase, liquidation, etc., shall report the deferred tax to the tax authority within 7 days after the actual collection of the corresponding amount according to the prescribed procedures.

Source: SAT

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