The State Administration of taxation (SAT) has released a new notice clarifying how foreign investors can apply for and use tax credits when they reinvest their distributable profits into Chinese companies. The policy allows eligible investors to offset Chinese tax liabilities if they commit to keeping the investment in China for at least five years. Under the new rules, foreign companies that use profits distributed by their Chinese subsidiaries to make direct equity investments – such as capital increases or establishing new ventures – can apply for a tax credit equal to 10% of the reinvested amount. Alternatively, they may opt for a lower rate based on applicable bilateral tax treaties.
For example, a foreign company that reinvests CNY10 million in distributed profits can select a 10% credit worth CNY1 million. If it later sells the investment after five years, it must repay the deferred withholding tax, but the credit can offset that amount. Li Xuhong, Professor at the Beijing National Accounting Institute, said: “The policy reduces the tax burden on foreign enterprises and supports the stable development of China’s economy. At the same time, it sends a strong signal that China welcomes long-term investment.” The guidance lays out various scenarios, from simple equity infusions to reinvestments via profit-derived cash or non-cash assets like securities or equipment. It also details the process of calculating credit entitlements and managing them over time. Although the incentive is available from January 1, 2025 through December 31, 2028, companies can continue to use any unused tax credit balances after the deadline.
Bai Yanfeng, Professor from the Central University of Finance and Economics, said that “such a provision better takes into account the actual needs of foreign investors and supports them in continuing to share in the growth dividends of Chinese companies,” as reported by the China Daily.
