Expansion of Tax Incentive for Overseas Investors Investing in the PRC
February 27, 2019 | BY
Daisy Duan &Linlin CaoDaisy Duan, partner, and Linlin Cao, senior associate, at King & Wood Mallesons examine the expanded scope of new regulations on tax deferral for qualified foreign investments in the PRC and also compare the differences between the old and new requirements
Subsequent to the introduction of a temporary waiver of enterprise income tax applied to overseas investors making direct investments with profits derived from China (Tax Deferral), the Ministry of Finance, the State Administration of Taxation (SAT), the National Development and Reform Commission and the Ministry of Commerce jointly issued a tax circular Cai Shui [2018] No.102, 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 (关于扩大境外投资者以分配利润直接投资暂不征收预提所得税政策适用范围的通知), on September 29, 2018 and the SAT issued the SAT Announcement [2018] No.53, Announcement on Issues Relevant to 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 (关于扩大境外投资者以分配利润直接投资暂不征收预提所得税政策适用范围有关问题的公告) on October 29, 2018 (collectively, New Regulations), to further expand the application scope of the Tax Deferral, with retrospective effect from January 1, 2018. Meanwhile, tax circular Cai Shui [2017] No. 88, Circular on Issues Concerning the Policy of Provisional Deferral of Withholding Income Tax on Direct Investments Made by Foreign Investors Using Distributed Profits (关于境外投资者以分配利润直接投资暂不征收预提所得税政策问题的通知) and the SAT Announcement [2018] No.3, Announcement on Issues Relevant to the Implementation of the Policy of Provisional Deferral of Withholding Income Tax on Direct Investments Made by Foreign Investors Using Distributed Profits (关于境外投资者以分配利润直接投资暂不征收预提所得税政策有关执行问题的公告), the regulations that introduced the Tax Deferral policy (Old Regulations), expired on the same dates.
The major change brought about by the New Regulations on the Tax Deferral is to expand qualified foreign investment in the PRC from encouraged industries to non-prohibited industries. This new change provides more flexibility to overseas investors when choosing investment projects in the PRC and reflects the Chinese government’s resolution to further encourage foreign investment in the PRC and expand fields that are opening up to investment.
Beside the previously mentioned changes, the New Regulations generally follow the rules as stipulated in the Old Regulations. In the following table, a comparison is made between the new and previous requirements for the purpose of benefiting from the Tax Deferral:
By largely following the previous requirements in the Old Regulations, the New Regulations maintain stability of the Tax Deferral policy and avoid confusion when applying preferential treatment by overseas investors. In the meantime, the expansion of the qualified investment scope in the New Regulations will eliminate potential disputes between overseas investors and tax authorities regarding whether the invested enterprises are falling within encouraged industries and it also provides a better environment for stable and sustainable development of foreign investment in the long run.
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