July 2025 - A new tax policy to encourage foreign investment & operation in China

We summarize down below the key takeaways for your reference.

Key policy benefits

Foreign investors meeting all conditions may claim a tax credit up to 10% of the reinvestment amount against their tax liability on dividends, interest and royalties.

Key eligible conditions for applying the policy

Eligible reinvestment must satisfy all the conditions as follows:

Sources of profit

• The distributed profits must derive from the retained earnings of the Chinese subsidiaries
• The profits must be actually distributed to the foreign investor

Forms of reinvestment

• Increase or conversion of capital or capital reserve
• Establishing a new enterprise in China
• Acquisition of equity in Chinese resident enterprises from unrelated parties

 Please note that investments in listed stocks are excluded, unless they qualify as strategic investments.

Period of reinvestment

• Reinvestments must occur between 1 January 2025 and 31 December 2028

Industry requirements

• The investee company must operate in industries encouraged* for foreign investment, such as manufacturing, high-tech sectors.

*The encouraged industries are listed in the National Catalogue of Industries Encouraging Foreign Investment.

Holding period

• The reinvestment must be held continuously for at least five-year (60 months)
• Early withdrawal will result in a proportional credit reversal and the requirement to pay taxes

Fund flow path

• If the profits for domestic direct investments are paid in cash or in-kind, the relevant funds or assets ownership shall be transferred directly from the profit-distributing enterprise's account to either the investee company's account or the equity transferor's account
• The funds may not be circulated among other accounts, or held by other enterprises or individuals on its behalf

Tax Treatment under the policy

Creditable tax liabilities

The withholding tax liabilities on dividends, interest and royalties obtained from the profit-distributing enterprise can be offset 

Tax creditable amount

• The maximum tax credit amount is 10% of the reinvestment amount, or the applicable treaty rate, whichever is lower
• Any excess portion after the credit for the current year may be carried forward to future years
• If foreign investors fully or partially withdraw the reinvestment before the required five-year (60 months) holding period, they must:

       - pay the deferred withholding taxes

      - adjust the tax credit amount on a pro rata** basis

Please note that the announcement does not specify how the pro rata adjustment will be calculated. Detailed guidelines are expected to be published.

Impact on Foreign Investors

This policy can directly reduce foreign investors' tax liability, providing immediate tax relief

It can also be combined with other industrial investment policies and preferential policies to enhance support for foreign investors

Point of attention

Some formalities need to be completed by investee company on behalf of the foreign investors before they can take advantage of this policy