STA Clarifies Tax Credit Policy for Direct Reinvestment by Foreign Investors Using Distributed Profits

The State Taxation Administration (STA) has recently issued the Announcement on Relevant Matters Concerning the Tax Credit Policy for Direct Reinvestment by Foreign Investors Using Distributed Profits (the "Announcement"), which will take effect on January 1, 2025.

According to the Announcement, where overseas investors use their distributed profits to make supplementary payments toward the registered capital they have already subscribed in domestic resident enterprises, thereby increasing paid-in capital or capital reserves, this shall be considered as "increasing the paid-in capital or capital reserves of a domestic resident enterprise through new contributions or capital conversion." The Announcement clarifies that the holding period of such reinvestments shall begin in the month of reinvestment as indicated in the Profit Reinvestment Information Form issued by the competent commerce authority. After benefiting from the tax credit policy on reinvested profits, if the foreign investor reduces or withdraws the investment, or transfers equity in the invested enterprise, the holding period for the recovered portion of the reinvestment shall be deemed to end in the month when the invested enterprise completes the equity change or deregistration procedures. The Announcement further states that when determining the amount of tax credit, overseas investors may opt to calculate it based on 10% of the reinvested amount, or according to the tax rate applicable to dividends as specified in the applicable tax treaty (or arrangement) if such rate is lower than 10%.



(Source: https://fgk.chinatax.gov.cn/zcfgk/c100012/c5242127/content.html)

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