China’s premier convened a state council executive meeting July 28, 2017, to outline measures encouraging foreign investment in China. The key measures include:
- Exempting withholding tax on profit distribution to foreign investors for direct reinvestment in encouraged projects
- Applying the “negative-list” approach, which is currently used in free-trade zones, as foreign investment guidance nationwide. That way, foreign investors to be engaged in activities not included on the “negative list” can enjoy the same treatment as domestic investors and set up business entities in China.
- Abolishing or relaxing restrictions on foreign shareholding in certain manufacturing and service sectors
- Encouraging local governments to offer incentives to multinational corporations for setting up regional headquarters in China
- Offering enterprise income tax incentives, e.g., a 15 percent tax rate, which currently applies to Advanced Technology Service Enterprises in pilot cities throughout the country
- Streamlining the visa and work permit application processes to foreign talents working in China
Among the above measures, exemption of withholding tax on profit distribution on reinvestment in encouraged projects seems to be most attractive to foreign investors. Under China’s prevailing tax regulations, when a Foreign Invested Enterprise in China distributes profits to its corporate shareholders, either the normal withholding tax rate of 10 percent or the reduced rate as stated in double tax treaties will apply. For reference, the details of encouraged projects are listed in the Foreign Investment Industrial Guidance Catalogue (2017 version).
As the above measures shall be implemented by the end of September 2017, it’s expected the Ministry of Finance and State Administration of Taxation will issue the implementation rules of the dividend preferential policy soon. We'll monitor the development and provide timely updates and insights.
Contact your BKD advisor if you have questions.