January 2018 - Withholding Tax Deferral For Foreign Reinvestment in China

Under the Enterprise Income Tax Law before the change, dividends derived by a non-tax resident enterprise (“Non-resident entity”) are subject to a withholding tax at 10% unless a more favourable tax treaty benefit applies. In August 2017, the State Council released measures to improve the business environment for foreign investors in China, including the proposal to allow foreign investors to enjoy a withholding tax deferral treatment.

On 28 December 2017, four PRC government bodies, namely the Ministry of Finance (“MOF”), State Administration of Taxation (“SAT”), National Development and Reform Commission (“NDRC”) and Ministry of Commerce (“MOC”) jointly issued Caishui [2017] 88 (“Caishui 88”), which clarifies the criteria to enjoy the withholding tax (“WHT”) treatment, application procedures and responsibilities, and post-administration by the tax authorities.

Subsequently, the SAT issued one public note [2018] No.3 (“Public Note No.3”) and an official interpretation to further elaborate the Caishui 88.

The treatment would be effective retrospectively from 1 January 2017, and tax payments already settled on eligible re-investment can be refunded.  The above four ministries also jointly released a list of Questions and Answers through the MOF’s official website on 28 December 2017.  Readers can also refer to the website on their interpretations.