The Ministry of Finance, the State Administration of Taxation (SAT), the National Development and Reform Committee and the Ministry of Commerce have jointly released Cai Shui (2018) No. 102, 'Circular on Expanding the Applicable Scope of the Policy of Temporarily Not Levying the Withholding Tax on Distributed Profits Used by Overseas Investors for Direct Investment' (Circular 102) to replace the previous Cai Shui (2017) No. 88, 'Circular on Policy Issues concerning Temporarily Not Levying the Withholding Tax on Distributed Profits Used by Overseas Investors for Direct Investments' (Circular 88).In order to update the relevant implementation regulations, the SAT has published the Announcement of the SAT (2018) No.53, Announcement of the SAT on Issues Concerning Expanding the Applicable Scope of the Policy of Temporarily Not Levying Withholding Tax on Distributed Profits Used by Overseas Investors for Direct Investments (Announcement 53) to replace the announcement on the Implementation of the Policy of Temporarily Not Levying the Withholding Tax on Distributed Profits Reinvested by Foreign Investors for Direct Investment (Announcement 3). In response to the updated Circular 102, Announcement 53 has also expanded the application scope of the tax deferral policy on the reinvested profit distribution by foreign investors. Announcement 53 shall be effective from January 1, 2018, while Announcement 3 becomes ineffective from January 1, 2018.
1. Temporary Tax Benefit
In a nutshell, and on very general terms, Circular 88 introduced a temporary exemption on profits “distributed” by a foreign invested enterprise to its overseas investor, provided that the said profits were re-invested in China, under certain legal forms, and subject to certain conditions. In other word, the tax benefit is deferred withholding tax.
2. Expand Scope of Reinvestment
Announcement 53 has deleted the required business operation scope of the qualified investment under the encouraged category.
3. Qualified Scenario as Capital Increase
Announcement 53 has specified a scenario as qualified capital increase.
4. Qualified Scenario as Direct Payment
Announcement 53 has specified a scenario as qualified direct payment.
5. Effective Period
Announcement 53 is effective from January 1, 2018. For the distributed profits received from January 1, 2017 to December 31, 2017, Circular 88 and Announcement 3 still prevail and the tax incentives are only applicable to the projects under the encouraged category.
Announcement 53 serves as the implementation guidance and supplementary explanation of Circular 102. It has further clarified certain conditions of qualified reinvestment and in consequence further expands the application scope of the tax deferral policy. Foreign investors are suggested actively consider the eligibility for the tax preferential policy for direct reinvestment and conform to the implementation regulations in the application of the tax incentives. At the same time, the investors need to keep a close contact with the in-charge tax authority to obtain a better understanding of the local practice of unclarified issues, such as the treatment of refunded tax from the reinvestment of dividend distribution, which in practice triggers many complexities.