Legal ref. No. Cai Shui [2017] No. 88
Promulgation Date: December 21 th 2017
Effective Date: January 1 st , 2017
How much China foreign investment environment has changed in the past decade, the “New Regulation on Withholding Income Tax for Overseas Investors in China” proves it.
In the past, China was one of the preferred investment area of world, able to collect rivers of funds. The main issue was to choose where such funds could be invested and where they could not be directed or where investment was subject to cooperation with a Chinese party, controlling the invested Chinese entity. Instead, China has recently come somehow closer to all those countries who have to strive to attract and keep foreign investments. At the same time, China is endeavoring to establish a better and more competitive tax environment for
foreign investments.
The new regulation on dividend tax deferral is one of the measures adopted to such purposes.
The concept of the dividend tax deferral regime was first introduced by the State Council in a circular (i.e. Guo Fa [2017] No. 39) dated August 8 th 2017 as a measure to encourage foreign
investors to expand their investments in China. According to such Circular, subject to certain prescribed conditions, dividends that are derived by a foreign investor from a resident
enterprise within China and are then directly invested into an encouraged investment project, should be eligible for the tax deferral policy, i.e. are not subject to immediate withholding tax.
But, in such Circular, this is only a principle, with no detailed rules.
Eventually, four months after Guo Fa [2017] No. 39 was issued, on December 21 th 2017, the Ministry of Finance, the State Administration of Taxation (SAT), the National Development
and Reform Commission and the Ministry of Commerce jointly released Cai Shui [2017] No. 88, concerning deferral of withholding tax on dividends when directly re-invested by foreign
investors (Notice 88 or the Regulation).
Notice 88 allows a non-resident enterprise (NRE) to defer payment of tax on dividends derived from a Chinese enterprise, if the NRE directly reinvests such dividends into industries
“encouraged” by the Chinese government. Notice 88 further specifies the conditions for enjoying this policy.
According to the Enterprise Income Tax Law of PRC and Regulation on the Implementation of the Enterprise Income Tax Law of the PRC, dividends distributed from a Chinese
subsidiary to a NRE’s shareholder are subject to 10% enterprise income tax, when a double taxation treaty does not stipulate a reduced rate. However, on the basis of Notice 88, when a non-resident enterprise meets certain conditions, it can “defer” tax payments on re-invested dividends, that is to say that EIT shall not be withheld. “defer” means not that EIT shall not be paid at all or that the Regulations grant a permanent tax exemption: EIT shall not be paid upon distribution of dividends, but only at a future time, when the dividends re-invested are eventually recovered by the overseas shareholder (because, for example, the invested company is liquidated or its shares transferred), EIT shall be paid off in accordance with
prescribed procedures stipulated in Notice 88.
The purpose of the Regulation is thus clearly that of encouraging overseas companies to keep their dividends in China in the long term. Under this respect, timing of Notice 88 does not
seem a coincidence, but appears to be a reaction to the measures adopted by US government in order to encourage US investors to repatriate their profits.
“Reinvestment” means that the foreign investor shall use the dividends received for direct investment, including for equity investments such as capital increase into an existing enterprise, formation of a new enterprise and share acquisition of an enterprise from an unrelated party, but excluding capital increase into and share acquisition of a listed company (unless the investment constitutes a qualified strategic investment into the listed company).
Profit which can be re-invested are those obtained by the overseas investors on or after January 1 st , 2017. For those overseas investors who are entitled to but have not received the benefit, they may apply for the tax refunds within three years after the actual payment of tax. Thus, it appears that overseas investors could ask for reimbursement of the paid tax, until 2019.
With regard to “encouraged projects”, reference shall be made to the Guidance Catalogue, classifying the fields and project where foreign investments are encouraged, limited or forbidden (the most updated Guidance Catalogue has been promulgated on 2017.
Foreign investors should carefully manage the re-investment transaction structure and prepare the relevant documentation to apply for the above mentioned tax temporary relief, in order to avoid certain pitfalls created by Notice 88 and loose the relevant tax benefit.
In conclusion, Notice 88 reflects the Chinese government’s attention to foreign investment, to establish a more attractive tax regime and, in general, to welcome foreign-funded enterprises under the trend of globalization.
Appendix
– Notice 88 (Chinese official version)
– Notice 88 (Unofficial translation, prepared by Backer and Mckenzie):
Link
– Guidance catalogue (Chinese official version)
Riproduzione riservata Avv. Paola Bernardi
