We have previously written an article with an overview of the different proposals for the purpose of improving the business climate for foreign companies in China. One of the proposals is a withholding tax deferral granted to foreign investors when certain requirements are fulfilled. In September 2018 some further updates as regards the tax deferral have been announced.
Dividends gained by a non-tax resident enterprise (“non-TRE”) from China are normally subject to withholding tax (10%) in China. The following requirements must all be fulfilled in order for the foreign investor to apply the tax deferral treatment:
- Encouraged projects: Previously the profits must be re-invested in so-called “encouraged projects” in the “Encouraged catalogue” in the “Industry Catalogue Guide for Foreign Investment” and also in the “Preferential Industry Catalogue for Foreign Investment in Central and Western Region catalogue”. This previous scope of the tax deferral treatment has been effective retrospectively from 1 January 2017. In September 2018 it has however been announced that there will be a new regulation extending the scope to include investments in all non-prohibited businesses and sectors. Re-investments in restricted sectors are still expected to enjoy the tax deferral treatment only if certain requirements are met. The new regulation is effective retrospectively from 1 January 2018. If the profits was received and reinvested in 2017, the old rule is still applicable).
- Direct investment: It must be a “direct investment” such as equity investments (injection in paid-up capital or capital reserves of Chinese TREs), establishments of new Chinese TREs, equity acquisitions of Chinese TREs from non-related parties. If none of the mentioned applies, the relevant authorities may decide if there are other situations that could be considered as “direct investment”. Investments in public-listed companies do not entitle to the tax deferral treatment, except for so-called “strategic investments”.
- Nature of the distributed profits: The profits invested must be dividends from equity investment distributed by Chinese TREs to their foreign investors.
- Direct payment: It does not make any difference whether the profits are in cash or not, but they must be directly transferred to the investee or equity transferor. An intermediary transaction would therefore entail that the right to apply the tax deferral treatment ceases.
If the foreign investor after enjoying the tax deferral treatment withdraws the direct re-investments through equity transfer, equity buyback, liquidation etc., they should report and settle the deferred tax payments with the in-charge tax authorities within 7 days upon the actual receipt of the relevant payment. There is a relief provision for foreign investors conducting an intra-group restructuring after the direct investment where the foreign investors under some circumstances can keep using the tax deferral treatment. Some aspects still however need to be clarified, e. g. the Notice does not further clarify how the deferred tax payment should be settled after the restructuring on future withdrawal of the direct re-investment through equity transfer, equity buyback or liquidation of the investee.
The tax deferral treatment aims to encourage foreign investors to invest in China and attract foreign capital into China. Profits received and reinvestment made during 1st January 2017 to 31 December 2017, may be applied for the tax deferral treatment within the previous scope and profits received and reinvestment made on or after 1st January 2018 may be applied for within the extended scope in order to obtain a refund of tax already paid. It is therefore advisable that foreign investors should further look into whether their profits, when re-invested, can be subject to the tax deferral treatment.
You are welcome to contact PwC’s China Desk for further questions regarding your company’s possibilities to apply for the tax deferral treatment in China.
Source: PwC China NTPS
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