In August 2017, the State Council released Notice Regarding Measures on Promoting the Growth of Foreign Capital in China (Guofa  No.39) , which sets forth 22 measures to further improve the business environment for foreign investors in China. One of the prominent supporting tax measures is to allow foreign investors to enjoy a withholding tax (WHT) deferral treatment (hereinafter refer to as the “tax deferral treatment” or the “treatment”) on the direct re-investment of profits distributed from Chinese tax resident enterprises (TREs) into China’s “encouraged projects”.
On 21 December 2017, the Ministry of Finance (MOF), State Administration of Taxation (SAT), National Development and Reform Commission (NDRC) and Ministry of Commerce (MOC) jointly unveiled this long-awaited year-end gift, i.e. the Notice Regarding the Provisional Deferral Treatment for WHT on Direct Re-investment by Foreign Investors Using Profits Distributed from TREs in China (Caishui  No.88, or the Notice), which clarifies the criteria to enjoy tax deferral treatment, application procedures and responsibilities, and post-administration by the tax authorities. According to the Notice, such treatment would be effective retrospectively from 1 January 2017, and tax payments already settled on eligible re-investment can be refunded. Subsequently, the above four ministries jointly released a list of Q&As through the MOF’s official website on 28 December 2017 (the Q&As), providing their interpretations on the background of certain provisions in the Notice and relevant implementation requirements.
The tax deferral treatment is a very favourable policy to attract foreign capital flow into China. Foreign investors that have generated profits from their investment activities in China are suggested to proactively assess their existing group investment strategy and adjust accordingly in order to fully leverage on such treatment. Meanwhile, they should also pay close attention to the local-level implementation of this tax deferral treatment and make early preparation.