Circular 88 Encourages Foreign Investors to Invest in China

According to this circular, after January 1, 2017, if foreign investors directly reinvest their profits distributed by China resident enterprises to some Encouraged Industries and meet certain prescribed conditions, then the 10 percent withholding income tax on the distributed profits may be deferred until the foreign investors' disposal of such reinvestment in China.

Uncollected withholding income tax for foreign investors must meet the following four conditions:

• Qualified direct reinvestment including the capital increase, new construction, equity purchase and other equity investment behaviors of foreign investors, but excluding newly increased, increase by transferring and acquired shares of listed companies (except for qualified strategic investment).
• The nature of the foreign investors shared the profits should be dividends, bonuses and other equity investment gains, which comes from retained earnings of a resident enterprise that has been realized , including retained the undistributed earnings in previous year.
• The cash dividends directly reinvested by the foreign investors should be directly transferred from the account of the Chinese enterprise distributing the dividend to the account of the investee Chinese enterprise or to the account of the equity transferor. Such cash dividends shall not be routed through any other bank accounts before the intended direct reinvestment.
• "Encouraged Industries" are industries listed as encouraged for foreign investment under the Catalogue for the Guidance of Foreign Investment Industries and the Catalogue of Priority Industries for Foreign Investment in the Central-Western Region. The above two catalogues are currently revised in 2017, and the relevant departments will be able to carry out the revised catalogue in the future.
• Eligible foreign investors shall enjoy temporary uncollected withholding tax treatment according to the regulations, However, in the future, if the investment is actually recovered, the withholding income tax shall be paid back. The “notice” provisions that foreign investors through equity transfer, repurchase, clearing disposal actually uncollected withholding tax treatment of dividends, bonuses and other equity investment gains, should be in the corresponding payment within 7 days after the actual collection, declare payment of taxes to the tax department.

For more information and any assistance, please contact Zetland Shanghai office at shanghai@zetland.biz or +86 21 6427 2930.