Clarifications on Tax Credit for Foreign Profits Reinvestment in China
According to an announcement jointly issued by Ministry of Finance, State Taxation Administration and Ministry of Commerce of the PRC on 27 June 2025, overseas investors may claim a 10% tax credit on their qualifying profits reinvestment in China conducted during the period from 1 January 2025 to 31 December 2028 with any unused credits carried forward until the unused credit is zero. If the applicable tax rate on dividends under the tax treaties between the Chinese government and foreign government is lower than 10%, the relevant treaty tax rate can be applied.
On 31 July 2025, State Taxation Administration of the PRC released the Announcement on Matters Related to the Tax Credit Policy for Overseas Investors’ Direct Investment with Distributed Profits to clarify certain related matters. The key contents of the announcement are as follows:
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Overseas investors use their profits distributed from resident enterprises in China to make up their subscribed capital of resident enterprises in China, increase paid-in capital or capital reserves shall be deemed as increasing the paid-in capital or capital reserves of domestic resident enterprises in China through new contributions or capital conversion.
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The reinvestment holding period shall commence from the month specified in the Profits Reinvestment Form issued by the competent authority of commerce and shall end in the earlier month when the overseas investor recovers the investment or the invested enterprise completes the legal process for the change.
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Overseas investors may choose to calculate the tax credit amount at 10% of the reinvestment amount or at an applicable treaty (or arrangement) tax rate on dividends lower than 10%. However, once 10% tax credit is selected, the lower treaty (or arrangement) tax rate on dividends shall not be applied anymore when the investment is recovered 5 years (60 months) later and the deferred tax is declared and paid.
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If one overseas investor has multiple eligible reinvestments in China, the tax credit amount shall be calculated separately based on the profits distributing enterprises.
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Foreign currency investments shall be converted into RMB at the central parity rate on the payment date to calculate deferred withholding income tax on dividends and the tax credit amount of the related reinvestment.
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Investment recovery shall be conducted in the following order: 1) investment that have enjoyed tax credit; 2) investment that tax credit is eligible but unused; 3) investment that is under tax deferral but ineligible for tax credit; 4) other investment.
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