Circular on Issues Relevant to Improving the Tax Credit Policy for Overseas Income of Enterprises

(Issued by the Ministry of Finance and the State Administration of Taxation on December 28, 2017 and effective as of January 1, 2017.)

Cai Shui [2017] No.84

Finance departments (bureaus), offices of the State Administration of Taxation and local taxation bureaus of the provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans, and the Finance Bureau of the Xinjiang Production and Construction Corps:

Pursuant to relevant provisions of the PRC Enterprise Income Tax Law, its Implementing Regulations and the Ministry of Finance and State Administration of Taxation, Circular on Issues Relevant to the Overseas Income Tax Credits of Enterprises (Cai Shui [2009] No.125), we hereby notify you on issues on improving the tax credit policy for overseas income of Chinese enterprises as follows:

1 .      An enterprise may opt to calculate its taxable income sourced from abroad separately either country by country (region by region) (i.e. “country by country (region by region) but not item by item basis”) or collectively not country by country (region by region) (i.e. “not country by country (region by region) and not item by item basis”), and calculate its deductible overseas income tax amount and tax credit limit based on the tax rate specified in Article 8 of document Cai Shui [2009] No.125. Once one of the aforementioned methods has been selected, it may not be changed for five years.

When an enterprise selects a method of calculating its deductible foreign income tax amount and tax credit limit (the New Method) that differs from that for the preceding year and, in accordance with document Cai Shui [2009] No. 125, there is a tax credit balance remaining from previous years, it may continue to carry forward the tax credit in its tax credit limit calculated by the New Method during the remaining carry-forward years specified in tax laws.

2 .      With respect to dividend income sourced from abroad, when an enterprise calculates the deductible income tax amount and tax credit limit relating to such overseas dividend income in accordance with provisions, the foreign enterprises in which it directly or indirectly holds at least 20% of the shares shall be limited to the five layers of foreign enterprises determined pursuant to the shareholding methods specified in Article 6 of document Cai Shui [2009] No.125, namely:

first layer: a foreign enterprise in which the enterprise directly holds at least 20% of the shares;

second layer to fifth layer: a foreign enterprise in which one next higher-level foreign enterprise directly holds at least 20% of its shares and such higher-level enterprise directly holds, or through one or more foreign enterprises in which it holds shares by a method complying with Article 6 of document Cai Shui [2009] No.125 indirectly holds, a total of at least 20% of its shares.

3 .      Other matters relating to overseas income tax credits of enterprises shall be handled in accordance with relevant provisions of document Cai Shui [2009] No.125.

4 .      This Circular shall be effective as of January 1, 2017.