To further attract foreign investment and encourage the reinvestment of profits within China, the Ministry of Finance, the State Taxation Administration, and the Ministry of Commerce jointly issued the “Announcement on the Tax Credit Policy for Foreign Investors’ Direct Reinvestment of Distributed Profits” on June 27, 2025, providing enterprise income tax (EIT) credit incentives for eligible foreign investors.
Core Policy Content
From January 1, 2025, to December 31, 2028, when an overseas investor directly reinvests profits distributed from a resident enterprise in China into encouraged industries within the country, they may be eligible for a tax credit equivalent to 10% of the investment amount. This credit can be used to offset the corporate income tax payable on future income obtained from the distributing enterprise.
This policy offers overseas investors clear and quantifiable tax savings while reflecting China’s policy direction of promoting high-quality opening-up. For multinational shareholders with established profit or dividend plans, this policy not only allows for tax deferral but also reduces future tax burdens, helping to optimize overall capital allocation and return structures.
Summary of Eligibility Requirements
- Profit Distribution Requirement: The reinvested profits must be retained earnings actually distributed by a Chinese resident enterprise to the foreign investor, forming equity investment income such as dividends.
- Permissible Forms of Reinvestment: Direct reinvestment using distributed profits may include capital increases, establishment of new enterprises, or equity acquisitions. Reinvestment into listed company shares is not permitted, except for qualifying strategic investments.
- Industry Requirement: The investee enterprise must operate within the nationally encouraged industries listed in the Catalogue of Industries for Encouraging Foreign Investment.
- Minimum Holding Period: The reinvested equity must be continuously held for at least five years (60 months).
- Fund Flow Restrictions:
- Cash Reinvestment: Funds must be transferred directly from the distributing enterprise’s account to the investee enterprise or equity seller’s account, and may not pass through other accounts before the investment is made.
- Non-Cash Reinvestment (e.g. physical assets, securities): Legal ownership must be transferred directly from the distributing enterprise to the investee enterprise or equity seller, and may not be temporarily or nominally held by other entities or individuals.
Scope of Tax Credit Application
The tax payable by an overseas investor that is eligible for the credit refers to the corporate income tax payable on the following types of income obtained from the profit-distributing enterprise after the date of the reinvestment:
- Dividends, bonuses (equity investment income);
- Interest;
- Royalties (e.g., for patents, trademarks, technology licenses).
Operational Process and Tax Obligation Handling
The foreign investor must submit documentation to the distributing enterprise evidencing compliance with the policy.
Based on the materials provided, the distributing enterprise may temporarily defer withholding the EIT on the reinvested profits.
When subsequently paying dividends, interest, or royalties to the investor, the enterprise will declare an offset against the investor’s payable corporate income tax to the competent tax authority.
Post-Investment Tax Administration
- Investment Held for 5+ Years: If an investor recovers all or part of a direct investment after holding it for five years (60 months), they must declare and make a retrospective payment of the deferred tax within 7 days of the recovery. The carry-forward balance of the tax credit may be used to offset this tax payable.
- Investment Held for Less Than 5 Years: If an investor recovers the investment in under five years (60 months), the investment is deemed as not satisfying the criteria for the tax incentive. In addition to making the retrospective payment of deferred tax, the investor will be subject to a pro-rata reduction in the amount of tax credits available. If the amount of tax credits already used exceeds the newly adjusted amount, the investor must make a retrospective payment for the excess portion within 7 days of recovery.
- Order of Disposal: Where a direct investment recovered by an investor includes portions that were subject to the tax credit and portions that were not, it shall be deemed that the investment subject to the tax credit policy is disposed of first.
What CW Can Do For You
While the policy provisions and conditions are clear, the operational procedures involving declarations, filings, and deferred tax handling are complex. We recommend that foreign investors focus on strategic decisions and entrust the compliance and filing process to a professional firm. Our team can provide you with comprehensive support, including:
- Designing the reinvestment structure and pathway;
- Assessing investment compliance and policy eligibility;
- Managing the credit filing and subsequent tax declaration process.
Let us help you securely enjoy the policy benefits and legally reduce your tax costs in compliance with all regulations. Please contact us today.
