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Policy on deferred tax payment for reinvestment with profit

Keywords: Reinvestment with profit, Encouraged investment projects, Temporarily exempted from withholding income tax, Refund of withholding tax paid in year 2017

On December 21,2017, Ministry of Finance released “Circular on Temporarily Exempting Withholding Tax for Foreign Investors to Direct Investment with Distributed Profit” (Cai Shui [2017] No. 88). Since January 1, 2017, the foreign investor’s distributed profit from resident enterprise in China, if it is directly invested into encouraged investment projects, can be temporarily exempted from withholding income tax. The tax will be paid when the investment is reimbursed by ways of share transfer, buy-back or liquidation.

A.      Types of direct investment with distributed profit

1.      Increaseor increase by reserve-conversion the paid in capital or capital reserve of resident enterprise in China,

2.     Newly set up a resident enterprise in China,

3.     Acquireshares of resident enterprise in China from unrelated party,

4.     Other forms described by Ministry of Finance or State Administration of Taxation.

In our opinion,using its profit to increase the same enterprise’s paid in capital, which is common in practice, is also within the first type, and can enjoy the policy on deferred tax payment.

B.      Restriction of invested enterprise

According to the regulation, only if the invested enterprise engages in encouraged industries, the foreign investor can enjoy the policy on deferred tax payment. These encouraged industries include:

Ø  Encouraged foreign investment industries listed in the “Catalogue for the Guidance of Foreign Investment Industries”.

Ø  Industries listed in the “Catalog of Priority Industries for Foreign Investment in the Central-Western Region”.

Ø  The effective “Catalogue for the Guidance of Foreign Investment Industries” and “Catalog of Priority Industries for Foreign Investment in the Central-Western Region” were both issued by National Development and Reform Commission and Ministry of Commerce in 2017.

C.      Issues to be noted

1.     Cash should be directly transferred from the account of enterprise distributing profit, to the account of invested enterprise or equity transferor. For example, if the profit is firstly transferred to the account of foreign investor, and then the foreign investor remits it to the account of invested enterprise or equity transferor, it is not valid for deferred tax payment.

2.     The invested enterprise should not be listed company.

3.     If shares are acquired, the equity transfer or should not be related party.

4.     Foreign investor needs to prepare relevant documents, and enterprise distributing profit needs to go through record-filing formalities. The specific required documents and procedures are not described in this circular, but we anticipate that State Administrator of Taxation will announce further documents soon.

D.      Important Notice

If in 2017,foreign investor reinvested with profit as described above, but the withholding taxes have already been paid according to income tax law or tax treaty, it is possible to apply tax refund. Due to time limitation of this tax refund application, we suggest our clients start to prepare the procedure as soon as possible.

ECOVIS David Yeung are always willing to provide assistance for you.