withholding taxes in China on invesment profits - HKWJ Tax Law

Mainland China Deferral of Payment of Withholding Tax on Investment Profits

On 21 December 2017, the Chinese central government authorities issued a tax circular Caishui [2017] No. 88 (“Circular 88”) on China investment profits by foreign investors. According to Circular 88 and subject to conditions discussed below, foreign investors are allowed to defer payment of withholding tax on dividend income from equity investments in Chinese resident enterprises, which would arise from distributing the realised retained earnings by these enterprises. This new mainland China tax beneficial policy has retrospective effect as from 1 January 2017.

 Tax Preferential Treatment Conditions on China Investment Profits

Pursuant to Caishui 88, in order to qualify for the deferral of withholding tax payment, conditions are required to be met including but not limited to the following:

  • Use of the investment proceeds

The investment proceeds are required to be directly used by the foreign investors for equity investments in Mainland China in either of the following forms

  1. A capital increment of the Chinese resident enterprises.
  2. The establishment of a new Chinese resident enterprises.
  3. The acquisition of a Chinese resident enterprises from non-affiliated companies.
  4. Other means of investments designated by the Ministry of Finance/State Administration of Taxation of Mainland China.

It is important to note that  this excluded listed enterprises unless the investments meet the conditions for strategic investments.

  • Nature of the investments

The investments in which the foreign investors invest must fall within (i) the encouraged foreign investment industries listed in the Foreign Investment Industry Guidance Catalogue; or (ii) the industries/business activities listed in the Priority Industry Catalogue for Foreign Investment in Central and Western Regions.

Payment of the deferred withholding tax

One has to be well aware that as soon as the foreign investors dispose of their equity investments i.e. after having benefited from the tax deferral, they are obliged to report and pay the deferred withholding tax to the Chinese tax authorities within 7 days after the investment proceeds have been received.

Consequences of lodging an incorrect tax deferral claim

Please also note that if the foreign investors fail to meet the conditions for the tax deferral treatment but have enjoyed the tax deferral benefits, it will be regarded as a failure to report the tax and these foreign investors will have to pay the withholding tax and at the same time will be subject to late payment interest, unless the errors are caused by the profit-distributing enterprise.

This China investment profits tax reform is expected to boost foreign investment in mainland China. Our can assist you to take profit of this new regulation and deal with mainland taxes as well.

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