China's new Enterprise Income Tax Law, which goes into effect January 1, 2008, will replace the two separate existing laws on enterprise income tax (EIT) applicable to domestically funded enterprises and foreign invested enterprises (FIEs). Although the Implementation Rules for the new tax law have not yet been issued, investors in FIEs should note that dividends to be repatriated to their overseas investors are likely to no longer be tax exempt. The anticipated Implementing Rules under the new law are likely to impose a 10 percent withholding tax on these dividends.
Before these details are clarified by the Implementation Rules, existing FIEs may consider seeking permission to distribute interim dividends in order to utilize the current exemption – for example, in cases of dividend repatriation. Corporations in China file estimated quarterly income tax, subject to adjustment at the end of the year. Companies in good financial condition, with profits remaining after the distribution, might be eligible for distribution of interim dividends, subject to approval from local tax authorities.