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Foreign investors may defer payment of withholding tax for distributed profits if
the same are used for reinvestment


4 January 2018
On 21 December 2017, the PRC Ministry of Finance, State Administration of Taxation, National Reform and Development Commission and Ministry of Commerce jointly issued the Circular on policy to defer collection from foreign investors of withholding tax on distributed profits that are used for further direct investment. The Circular will be retroactively implemented from 1 January 2017.
Prior to the Circular, except for the further preferential tax treatments that may be applicable pursuant to relevant tax treaties/arrangements, the income of dividends distributed to a foreign investor as derived from the PRC is generally subject to a 10% withholding tax.
However, according to the Circular, as from 1 January 2017, a foreign investor may, if the prescribed conditions are satisfied, defer the payment of withholding tax on the profits distributed by a PRC resident enterprise if such profits are used for further direct investment (including capital increase to a PRC resident enterprise, investment for establishment of a new PRC resident enterprise, acquisition from a non-affiliated entity or individual of shares in a PRC resident enterprise, as well as the other allowed equity investments); and the withholding tax on such profits will be collected by tax authority when that foreign investor recoups (by equity transfer, buy-back, liquidation, etc.) the further direct investment made by such profits.
According to the Circular, to enjoy the said preferential policy of deferring payment of withholding tax, one of the conditions that must be satisfied is that, within the term of investment made by the foreign investor, the business activities engaged by the invested enterprise must belong to the encouraged category listed in the Guidance Catalogue of Foreign Investment Industries or belong to the industries listed in the Catalogue of Priority Industries for Foreign Investment in the Central-Western Region.
According to the Circular, if a foreign investor may enjoy the policy to defer the payment of withholding tax for any income of dividends and other equity investment returns distributed from 1 January 2017 (inclusive), but the said withholding tax has been paid, that foreign investor may, within three years from the date of actual payment of the relevant withholding tax, apply for enjoying the policy under this Circular retroactively and for refund of the already paid withholding tax.
Obviously, the Circular will play a role to encourage foreign investors to retain their distributed profits in China and reduce the outflow of foreign exchange from China.

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Disclaimer
Any legal information contained in this newsletter is general in nature and laws and regulations are changing from time to time and compliance will always depend upon the particular circumstances. We have not attempted to give exhaustive descriptions of law or to give a legal opinion on specific legal issues. You should not rely on this newsletter as a legal advice for any particular purpose.

 

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