State Administration of Taxation, Issues Relevant to Refund of Company Income Tax to Foreign Investors for Re-investment Circular

Issued: July 17 2002

Main contents: The Circular clarifies that where a foreign-invested enterprise, in accordance with a resolution of its board of directors, reinvests after-tax profits extracted for its provident fund (or development fund or saving fund) and hence increases its registered capital, the part of re-investment that is from the foreign investor is entitled to tax refunds in accordance with the PRC, Foreign Investment Enterprise and Foreign Enterprise Income Tax Law (Tax Law) (Item One).
"Directly uses such profits as investment for the establishment of another foreign-invested enterprise" as provided by Paragraph One of Article 80 of the implementing rules of the Tax Law means that the re-investment shall constitute a part of the new enterprise's registered capital or be used to increase the registered capital of an already existing foreign-invested enterprise. However, re-investment used to purchase equity rights in an existing company that does not increase the registered capital or operating capital of that enterprise does not qualify (Item Two).
The annual total amount of reinvested after-tax profits that qualify for tax refunds shall not exceed the result of the following formula: (taxable income minus income tax paid) multiplied by the foreign investor's shareholder ratio.
Related legislation: PRC, Foreign Investment Enterprise and Foreign Enterprise Income Tax Law, April 9 1991, CLP 1991 No.3 p25; PRC, Foreign Investment Enterprise and Foreign Enterprise Income Tax Law Implementing Rules, Jun 30 1991, CLP 1991 No.7 p16; Questions Relevant to Re-investment Tax Rebates for Foreign-invested Enterprises Official Reply, 1995; Establishment of Companies with an Investment Nature by Foreign Investors Tentative Provisions, Apr 4 1995, CLP 1995 No.6 p45; 《Establishment of Companies with an Investment Nature by Foreign Investors Tentative Provisions》Supplementary Provisions, Aug 24 1999, CLP 1999 No.8 p5 and 《Establishment of Companies with an Investment Nature by Foreign Investors Tentative Provisions》Supplementary Provisions (2), May 31 2001, CLP 2001 No.6 p46