China is experiencing a certain decrease in foreign investment resulting, amongst other reasons, from the increasing labor and other costs. The State Administration of Taxation (“SAT”), the Ministry of Finance, the Ministry of Commerce and the National Development and Reform Commission, have jointly launched a new tax preferential policy for overseas investors, 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 boost the economy, further encourage foreign investments, and promote continuing operations within China on a long-term basis. The new tax policy allows the foreign investors to temporarily defer the withholding taxes on distributed rofits that are re-invested directly into China, if certain conditions are met.

For example, if an overseas investor uses profits distributed from its Chinese subsidiary and increases paid-in capital of the subsidiary or contributes said funds to establish a new subsidiary in China, the tax on such distributed profit will be deferred under certain conditions. If the conditions change (i.e. the investor withdraws the investment or no longer meets the requirements), the withholding taxes will be due and supplementary tax payment will need to be made. The below sections further explain and analyze the relevant regulations, scope, responsibilities and procedures in detail.

Subsequent to the issuance of Circular 88, the SAT issued an announcement on the Implementation of the Policy of Temporarily Not Levying the Withholding Tax on Distributed Profits Re-invested by Foreign Investors for Direct Investment (“Announcement 3”). It further specifies the implementation procedures in different circumstances, the corresponding supporting documents required as well as the reporting and filing obligations.

The following sections provide a nutshell of Circular 88 and Announcement 3 and the potential tax impact on nonresident enterprises that have an investment in China.


According to general Chinese tax laws and regulations, profits distributed from Chinese resident enterprises (“Profit Distributor”) to foreign investors are subject to Enterprise Income Tax (“EIT”) at 10%. However, foreign investors could be eligible to enjoy a preferential tax rate for dividends in accordance with different double taxation agreements between China and the relevant country (“DTA”). The EIT payable shall be withheld at source and the Profit Distributor is the withholding agent.


According to Circular 88, where an overseas investor makes a direct investment in a Chinese resident company under the encouraged category (“Invested Enterprise”) with the profits proceeding from the Profit Distributor, a tax deferral policy on profit distribution may apply provided that the following requirements are fulfilled concurrently:

a) The direct investment made by an overseas investor may refer to the below:

  • Directly increasing or increasing by transferring paid-in capital or capital reserves (“Capital Increase”) in an existing Chinese resident enterprise;

  • Establishing a new resident enterprise within the territory of China;

  • Acquiring equities of a Chinese resident enterprise from a non-related party (“Acquisition”);

  • Other forms of investment specified by the Ministry of Finance and the State Administration of Taxation.

Please note that the aforementioned Capital Increase and Acquisition exclude shares from listed companies, unless they meet certain conditions as strategic investment.

b) Profits obtained by an overseas investor refer to returns on equity investment, such as dividends and bonus generated from retained income that has been actually distributed by the Profit Distributor to the foreign investor.

c) Where the direct investment is paid in cash, the said payment shall be directly made from the Profit Distributor into the account of the Invested Enterprise or the party that sells the equities. The cash payment shall not be paid into any other foreign or domestic account prior to the direct investment; where the direct investment is paid in non-cash forms, such as by means of a contribution in kind, securities, the ownership of relevant assets shall be directly transferred from the Profit Distributor to the Invested Enterprise or the party that sells the equities. The non-cash payment shall not be held by any other enterprise or individual on a commission or temporary basis.

d) The business activities (1) carried out by the Invested Enterprise must be under the encouraged category, including:

  • The category of industries to which foreign investors are encouraged to enter, as listed in the Catalog for the Guidance of Foreign Investment Industries; and
  • The Catalog of Priority Industries for Foreign Investment in the Central-Western Region.


3.1 Obligations of foreign investors

The obligations of the foreign investor may vary subject to the following circumstances:

  • If the foreign investor is eligible for the tax deferral policy, the foreign investor shall submit the Reporting Form on the Information Concerning the Deferral Withholding Tax of Non-resident Enterprise (“Reporting Form”) to the Profit Distributor;
  • If the foreign investor has already settled the withholding tax payments on profit distribution but would like to resume the eligibility for tax deferral, the foreign investor shall submit the Reporting Form, the related contracts, payment evidences, the information related to the encouraged investment and other required documents to the competent tax authority of the Profit Distributor; or • If the foreign investor is obliged to underpaid taxes, the foreign investor shall submit the Reporting Form to the competent tax authority of the Profit Distributor.

3.2 Obligations of the Profit Distributor

The Profit Distributor shall review and correct (if necessary) the Reporting Form provided by the foreign investor (“Reviewed Reporting Form”) so as to ensure the complexness, the accuracy and authenticity. After the comprehensive review, the Profit Distributor shall submit the Reviewed Reporting Form and the Reporting Form on Withholding EIT to its competent tax authority within 7 days of the actual payment on profit distribution.

In case that the Profit Distributor fails the reviewing responsibilities and result in the incorrect application of the tax deferral policy, the competent tax authority of the Profit Distributor may impose late interest payment and penalties on the Profit Distributor.

3.3 DTA for withholding tax on profit recovered

If the re-investment is withdrawn or the requirements for the tax deferral are not satisfied any more, the deferral withholding taxes will need to be settled with the competent tax authority of the Profit Distributor. However, investors may enjoy the preferential withholding tax rate under the DTA, which was in force when the profits were paid. In other words, subsequent provisions of the DTA, which prevail after the payment of profits, may not be applicable.

3.4 Agent

The overseas investors and the Profit Distributor may authorize an agent to handle the specific tax matters herein, but a written Letter of Power of Attorney must be provided to the competent tax authority for this purpose.


The new tax deferral policy on withholding tax has been an important and obvious incentive for foreign investors who have existing businesses in China. Such foreign investors are encouraged to take a review of their current investment strategy and make an adjustment to business arrangements if necessary so as to better enjoy the tax preferential policy. 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 implementation procedures and prepare in advance.

There are still certain implementation issues that need to be further defined and clarified through cooperation and coordination with the in-charge tax authority, such as whether the tax deferral policy is applicable to all kinds of re-investments, such as re-investing the profits obtained from a liquidation into a new company, and the relationship between the tax deferral policy and double tax treaties. It is foreseeable that the SAT will come up with subsequent regulations to clarify these implementation issues. We will closely track the relevant policy development and share our insight in time.

(1) Announcement 3 defines the business activities as follows:

  • Manufacturing products or offering services;
  • Carrying out activities for the research and development purpose;
  • Investing in construction projects or purchase of machinery or equipment; and
  • Other business activities.