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Reinvestment Withholding Income Tax

Foreign Direct Investment (FDI) has been an important driver for China’s economy since the beginning of the reform period in the early 80s. So it is small wonder that the Chinese government wants to remain an attractive destination for foreign firms and their investments. Since taxes are a crucial tool to manage FDI, China, too, tries to improve the tax environment for foreign investors.

 

Therefore, on 21 December 2017, the Chinese Ministry of Finance issued a circular, which temporally exempts foreign firms from paying provisional income tax (also called withholding income tax) on certain reinvested profits. The new regulation will be applied retroactively from 1 January 2017. Thus, foreign firms, which have already paid the tax, can apply for a refund from the tax authorities.

 

Which reinvestments are tax-free?

 

Not all reinvestments are tax-free. In order to be exempt or be eligible for a refund, four criteria have to be all met at the same time:

 

  1. The reinvestment has to be carried out directly and must be used for a capital increase, a new facility or company setup, the purchase of equity rights or similar investments. However, investment in listed companies is excluded.
  2. The investment has been derived from dividends, equity interests or other passive income from a company in China!
  3. The investment has to be carried out directly from the bank account of the Chinese entity distributing the passive income. Neither is it allowed to use other accounts nor are other prior transfers permitted. Also, no other entity or legal persons can act as an investor. Equally, if shares or similar non-liquid assets are used as payment, those shares or assets must not be held, even temporarily, by other shareholders prior to the investment.
  4. The investments have to be made in sectors:

a) where FDI is explicitly encouraged (the complete list of these sectors in English can be found here);

b) which are included in the Industrial Catalogue of Foreign Investment Benefits in the Central and Western Regions (the Chinese list can be found here).

 

Recommendations by our ECOVIS Beijing Tax Consultants

 

The new regulation clearly benefits foreign-invested enterprises in China, which, in 2017, have used their Chinese profits to reinvest in the country or plan to do so next year.

 

However, since the some of the conditions, especially Point 3, are quite detailed, companies should plan ahead, if they want to use their profits from 2017 for this purpose. For example, once passive income has been transferred to a foreign holding company, cannot benefit from the tax exemption. What is more, the transfer itself will be subject to a withholding tax (for more information read our article).

 

What our tax consultants can do for you?

 

  • Eligibility check of your investment
  • Tax Filing and Application for Tax Refunds
  • Check for other potential FDI tax benefits (i.e. High-Tech-Status)

 


  

ECOVIS Beijing is a Sino-German consultancy focusing on accounting, audit, tax, legal, and FDI advisory. For more information or questions on withholding income tax in China or our tax services, please contact This email address is being protected from spambots. You need JavaScript enabled to view it.

 

Contribution by Andy Chau

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Richard Hoffmann

Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: This email address is being protected from spambots. You need JavaScript enabled to view it.

Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up for our Newsletter, give us a call +86 (10) 6561 6609 or contact us directly via This email address is being protected from spambots. You need JavaScript enabled to view it.
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