On 1 August 2025, the State Administration of Taxation (SAT) issued the Announcement on Matters Relating to the Tax Credit Policy for Direct Investment by Foreign Investors with Distributed Profits (No. 18 of 2025). This document provides detailed guidance on the recently introduced Tax Credit Policy for Foreign Investors Directly Investing in Distributed Profits (No. 2 of 2025), jointly issued by the Ministry of Finance, SAT, and the Ministry of Commerce.
The policy builds on the existing deferred tax system, under which corporate income tax on reinvested distributed profits can be postponed. The new tax credit mechanism adds a further incentive, enabling foreign investors to offset future tax liabilities when reinvesting profits earned in China.
Continuity with Deferred Taxation
The new policy does not replace the deferred tax mechanism but complements it. Foreign investors who qualify for the tax credit may still benefit from deferred tax treatment, ensuring continuity with earlier incentives. The credit system is designed as a phased measure, strengthening incentives for reinvestment.
Holding Period and Eligibility
To qualify, reinvestments must be held for at least five consecutive years (60 months). The calculation period begins from the date specified in the Profit Reinvestment Statement issued by the competent commerce authority. Disposal of the reinvestment before the five-year threshold triggers a reduction of the tax credit and repayment of deferred corporate income tax, along with late payment penalties.
Determining the Tax Credit
Foreign investors may choose between two methods when calculating the credit:
- A flat 10% of the reinvested amount; or
- A lower withholding tax rate stipulated under applicable tax treaties.
Once selected, this choice is binding for the reinvestment concerned. Importantly, credits are tied to the specific profit-distributing enterprise and cannot be transferred across different sources of income.
For instance, dividends reinvested from multiple Chinese subsidiaries generate separate credit amounts, each applied only against tax liabilities linked to the respective distributing company.
Adjustments, Compliance, and Penalties
The SAT highlights strict compliance requirements. If a reinvestment is disposed of early or if conditions are later found unmet, the tax credit amount must be adjusted downward. Deferred tax on distributed profits must then be paid in proportion to the amount withdrawn.
Where tax has been underpaid due to improper use of credits, late payment surcharges are applied, calculated from the date the credit was first used. This underscores the emphasis on accurate reporting and lifecycle compliance.
Creditable Tax Liabilities
Not all taxes qualify for offset. Only corporate income tax liabilities arising from dividends, interest, or royalties obtained after the reinvestment date and from the same distributing enterprise may be credited. This ensures a direct link between reinvested profits and subsequent tax obligations.
Currency Conversion
For reinvestments made in foreign currencies, the RMB equivalent is calculated using the central bank’s exchange rate on the actual payment date. This rule minimizes exchange-related distortions when computing credits and deferred tax.
Recovery of Investments
The sequence of investment recovery is strictly defined. Reinvestments that have enjoyed the tax credit are deemed recovered first, followed by those that qualified but did not claim credits, then those under deferred tax only, and finally other investments. This ordering ensures transparency and avoids double benefits.
Policy Period and Transitional Arrangements
The tax credit policy applies to reinvestments made between 1 January 2025 and 31 December 2028. However, credits that remain unused after 2028 can continue to offset eligible tax liabilities until fully exhausted.
For investments made after January 2025 but before the official release of the policy, foreign investors may apply retrospectively, although credits can only offset tax liabilities incurred after the policy’s issuance.
Implications for Foreign Investors
The introduction of the tax credit policy marks a further step in China’s effort to encourage reinvestment of foreign profits into the domestic economy. By offering both deferral and credit mechanisms, the policy reduces financing costs for reinvestment while reinforcing regulatory oversight.
For multinational corporations operating in China, the announcement provides clarity on compliance procedures but also highlights strict conditions on holding periods, eligible uses, and reporting obligations. Investors will need to carefully align profit repatriation and reinvestment strategies with these rules to fully benefit from the available incentives.