Circular by Three Authorities: Foreign Investors May Enjoy Tax Credit for Re‑investing Distributed P
To further encourage foreign investors to keep investing in China
On 30 June, the Ministry of Finance, the State Taxation Administration and the Ministry of Commerce issued the Announcement on Tax Credit Policies for Foreign Investors Re‑investing Distributed Profits.
It clarifies that between 1 January 2025 and 31 December 2028, foreign investors who use profits distributed by Chinese resident enterprises for domestic direct investment may qualify for tax credits subject to compliance with relevant conditions.
Under the Announcement, eligible foreign investors may claim a tax credit equal to 10 % of the investment amount against their current‑year taxable income. Any unused credit may be carried forward to subsequent tax years. Where the tax treaty concluded between the Government of the People’s Republic of China and a foreign government prescribes a withholding rate lower than 10 % for equity‑investment income such as dividends, such treaty rate shall prevail.
Qualifying conditions for the tax‑credit incentive
Five conditions must all be satisfied:
Five conditions must all be satisfied:
The profits received by the foreign investor are dividend, bonus and other equity‑investment income actually distributed from retained earnings by a Chinese resident enterprise.
Domestic direct investment funded by distributed profits includes capital increase, new project establishment, equity acquisition and other equity investments.
This excludes subscription, capitalization or acquisition of shares in listed companies, except for qualified strategic investments.
During the holding period of the domestic re‑investment, industries operated by the invested enterprise fall within the National Catalogue of Encouraged Industries for Foreign Investment under the Catalogue of Encouraged Industries for Foreign Investment.
The foreign investor shall hold the domestic re‑investment continuously for no less than 5 years (60 months).
Where the investment is made in cash: funds shall be transferred directly from the profit‑distributing enterprise’s account to the investee or equity transferor’s account; funds must not circulate through any other domestic or overseas accounts prior to investment. Where the investment is made in‑kind or via securities: title to such assets shall pass directly from the profit‑distributing enterprise to the investee or equity transferor; no interim or nominee holding by any other entity or individual is permitted prior to investment.
Divestment after holding for 5 years (60 months) or longerWhen a foreign investor disposes of all or part of the tax‑credit‑qualified investment after the 5‑year holding period, it shall file with the tax authority at the place of the profit‑distributing enterprise within 7 days upon divestment to settle the deferred tax. Any remaining carried‑forward tax‑credit balance may offset its taxable amount.
Divestment before completing the 5‑year (60‑month) holding periodIf all or part of the tax‑credit‑qualified investment is divested before the 5‑year threshold is met, the relevant profit distribution shall be deemed ineligible for the incentive. Besides settling the deferred tax as mentioned above, the foreign investor shall have its available tax‑credit amount reduced proportionally.
Foreign investors claiming benefits under this policy shall submit documentation proving compliance with all conditions to the profit‑distributing enterprise in accordance with tax‑administration requirements.
Commerce authorities at all levels, together with relevant departments, shall strengthen follow‑up oversight over profit‑funded re‑investment by foreign investors. Where post‑review finds an investor has received tax credits without satisfying statutory conditions, commerce authorities shall notify tax authorities and cooperate in tax recovery.
Important notes
This Announcement shall apply from 1 January 2025 to 31 December 2028.
Any unused tax‑credit balance remaining after 31 December 2028 may be utilised until fully exhausted.
Investments made from 1 January 2025 up to the release date of this Announcement that satisfy the criteria may retroactively apply for the tax credit from the Announcement’s issuance date. The corresponding credit amount may offset eligible taxable liabilities arising after the issuance date.
Investments occurring before 1 January 2025 cannot retroactively benefit from this policy.
Source: Shenzhen Municipal Bureau of Commerce