Circular on Expanding the Scope of Application of the Policy of Provisional Deferral of Withholding Income Tax on Direct Investments Made by Foreign Investors Using Distributed Profits

I.  The scope of application of the policy of provisional deferral of withholding income tax on direct investments made by foreign investors using profits distributed by tax-resident enterprises in China shall be expanded from foreign-invested projects in the encouraged category to all projects and sectors in which foreign investment is not prohibited.

II. In order that withholding income tax is provisionally deferred, a foreign investor must satisfy all of the following conditions:

(1) It makes a direct investment using profits distributed to it, including equity-type investments such as a capital increase, new establishment and equity acquisition made using the distributed profits, but excluding a new increase in, conversion of the profits into, or acquisition of the shares of, a listed company (excluding a qualified strategic investment). More specifically:

1. a new increase in, or a conversion of the profits into, the paid-in capital or the capital reserve of a tax-resident enterprise in China;

2. investment in the establishment of a new tax-resident enterprise in China;

3. acquisition of equity in a tax-resident enterprise in China from a non-affiliated party; or

4. another means as specified by the Ministry of Finance or the State Administration of Taxation.

All of the enterprises in which foreign investors invest by means of the methods set out above are collectively referred to as “Investee Enterprises”.

(2) The profit distributed to the foreign investor is equity-type investment returns, such as dividends and extra dividends arising from realized retained earnings and actually distributed to investors by the tax-resident enterprise in China.

(3) If the profit used by the foreign investor for direct investment is paid in the form of cash, the relevant amount shall be transferred from the account of the profit distributing enterprise directly into the Investee Enterprise's or equity transferor's account, and may not pass through other accounts inside or outside China before direct investment. If the profit used by the foreign investor for direct investment is paid in non-monetary form, such as in kind or negotiable securities, the ownership of the relevant assets shall be transferred from the profit distributing enterprise directly to the Investee Enterprise or equity transferor, and may not be held on the foreign investor's behalf or temporarily held by another enterprise or individual before direct investment.

III. Where a foreign investor satisfies the conditions set out in Article II hereof, it shall carry out a filing in accordance with tax administration requirements and provide to the profit distributing enterprise true documentation evidencing its satisfaction of the policy conditions. If, following an appropriate review, the profit distributing enterprise deems that the foreign investor satisfies the provisions hereof, it may provisionally defer withholding income tax in accordance with Article 37 of the Enterprise Income Tax Law and carry out record filing procedures with the competent tax authority.

IV. Tax departments shall strengthen follow-up administration in accordance with the law. If a foreign investor has benefited from the policy of provisional deferral of withholding income tax specified herein and, following verification carried out in the follow-up administration of the tax department, it is determined that such foreign investor does not satisfy the specified conditions, and provided that the liability does not lie with the profit distributing enterprise, the foreign investor shall be deemed as having failed to file and pay enterprise income tax in accordance with provisions, its liability for late payment of tax shall be pursued in accordance with the law and the period of late payment of tax shall commence to count from the date on which the relevant profit was paid.

V. If, in accordance herewith, a foreign investor is eligible for the policy of provisional deferral of withholding income tax specified herein but does not actually take advantage of the policy, it may retroactively apply within three years from the date on which the relevant tax amount was actually paid and have the tax paid refunded.

VI. If a foreign investor, through means such as an equity transfer, buyback or liquidation, actually recovers its direct investment that had been eligible for the policy of provisional deferral of withholding income tax, it shall file and pay the deferred tax amount to the tax department by the prescribed procedure within seven days after actual receipt of the relevant amount.

VII. If, after a foreign investor takes advantage of the policy of provisional deferral of withholding income tax specified herein, the Investee Enterprise undergoes a restructuring that complies with special restructuring conditions and actually carries out the tax treatment for a special restructuring, the foreign investor shall continue to be eligible for the policy and will not be required to pay the deferred tax in accordance with Article VI hereof.

VIII. For the purposes of this Circular, the term “foreign investor” means a non-tax-resident enterprise to which the third paragraph of Article 3 of the Enterprise Income Tax Law applies. For the purposes of this Circular, the term “tax-resident enterprise in China” means a tax-resident enterprise established in China in accordance with the law.

IX. This Circular shall be effective as of January 1, 2018. The Circular on Issues Concerning the Policy of Provisional Deferral of Withholding Income Tax on Direct Investments Made by Foreign Investors Using Distributed Profits (Cai Shui [2017] No.88) shall be repealed simultaneously. This Circular shall be applicable to equity investment-type returns, such as dividends and extra dividends earned by foreign investors commencing from January 1, 2018. Tax amounts that have already been paid shall be handled in accordance with Article V hereof.