STA Interpretation: Tax Credit Policy for Overseas Investors Directly Reinvesting Distributed Profits

关于《国家税务总局关于境外投资者以分配利润直接投资税收抵免政策有关事项的公告》的解读

Source (Chinese): STA Policy Database — 政策解读 (International Taxation Division, July 31, 2025)

English translation: Independent translation. Not an official government translation.

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Pursuant to the Announcement of the Ministry of Finance, the State Taxation Administration, and the Ministry of Commerce on the Tax Credit Policy for Overseas Investors Directly Reinvesting Distributed Profits (Announcement [2025] No. 2, hereinafter the "MOF/STA Announcement"), the STA has issued the Announcement of the State Taxation Administration on Matters Relating to the Tax Credit Policy for Overseas Investors Directly Reinvesting Distributed Profits (Announcement [2025] No. 18, hereinafter the "Administration Announcement"). The following interpretation is provided on the implementation of the tax credit policy for overseas investors directly reinvesting distributed profits (hereinafter the "tax credit policy"):

Q1: After the issuance of the MOF/STA Announcement and the Administration Announcement, does the policy of temporarily not levying EIT on overseas investors directly reinvesting distributed profits (the "tax deferral policy") remain effective?

Answer: The Administration Announcement does not affect the validity of the tax deferral policy; the relevant documents for the tax deferral policy continue to apply. The tax credit policy provides a phased tax incentive for overseas investor reinvestment. Overseas investors who enjoy the tax credit policy may still enjoy the tax deferral policy.

Q2: How should "the period during which the overseas investor holds the reinvestment" be understood?

Answer: The period during which the overseas investor holds the reinvestment starts from the month of the reinvestment date specified in the Reinvestment Information Form (利润再投资情况表) issued by the competent commerce authority. The period ends at the earlier of the month in which the investment proceeds are recovered or the month in which the investee enterprise completes the required legal form change procedures.

Illustrative Example: In October 2025, overseas Company A received distributed profits from domestic Company Jia and reinvested the entire amount as a capital increase in Company Jia. On November 20, 2025, Company A obtained the Reinvestment Information Form issued by the competent commerce authority, which specified the reinvestment date as October 28. On September 3, 2030, Company A transferred all of its equity in Company Jia, and Company Jia completed the equity change procedures on the same day. On November 1, 2030, Company A received the equity transfer payment. Company A held the reinvestment from October 2025 to September 2030, a total of 60 months, which satisfies the requirement that the reinvestment must be held continuously for at least 5 years (60 months).

Q3: How should the tax credit amount be calculated when an overseas investor makes a reinvestment?

Answer: When an overseas investor makes a reinvestment, the tax credit amount is calculated differently depending on two scenarios:

Scenario 1: For eligible enterprises, when determining the tax credit amount, the investor may choose to calculate based on either 10% of the reinvestment amount or the dividend tax rate lower than 10% as provided in the applicable tax treaty (or arrangement). Once the rate is selected, when the investment is subsequently recovered, the investor may not apply a lower dividend tax rate under the tax treaty (or arrangement).

Scenario 2: Where the same overseas investor has multiple qualifying domestic reinvestments, the tax credit amounts shall be aggregated separately by profit-distributing enterprise.

Illustrative Example (Scenario 1): In October 2025, Company B from Country A received RMB 10 million in distributed profits from domestic Company Jia and reinvested the entire amount as a capital increase in Company Jia, meeting the conditions of the tax credit policy. Under the China-Country A tax treaty dividend article, Company B may choose to apply a 5% dividend tax rate. When determining the tax credit amount, Company B may choose to apply either the 10% or 5% rate. If 10% is selected, the tax credit amount for this reinvestment is RMB 1 million. In October 2031, when Company B recovers the investment and files to pay the deferred tax, it shall pay RMB 1 million in tax on this reinvestment and may not apply the 5% treaty rate. If 5% is selected from the beginning, the tax credit amount for this reinvestment is RMB 500,000. Upon recovery of the investment, Company B shall calculate and pay RMB 500,000 in tax based on the previously confirmed treaty rate of 5%. If the tax authorities subsequently determine that Company B does not qualify for treaty benefits and require it to pay RMB 1 million in tax on the profits corresponding to this reinvestment, the taxpayer may correspondingly increase its tax credit amount based on the additional tax paid.

Illustrative Example (Scenario 2): Overseas Company A received RMB 5 million in distributed profits from domestic Company Jia and RMB 70 million from Company Yi, and reinvested the entire amounts in domestic Company Bing, all meeting the conditions of the tax credit policy. The tax credit amount accumulated by Company A in relation to Company Jia is RMB 500,000, and in relation to Company Yi is RMB 7 million. Subsequently, if domestic Company Jia pays royalties to Company A, generating withholding tax payable of RMB 600,000, the RMB 500,000 credit amount accumulated by Company A in relation to Company Jia may be used to offset RMB 500,000 of Company A's tax payable. The remaining RMB 100,000 in withholding tax must be paid and may not be offset using the RMB 7 million credit amount accumulated in relation to Company Yi.

Q4: How is the tax credit amount adjusted?

Answer: Where the tax authorities discover during subsequent administration that an overseas investor should not have enjoyed the tax credit policy (including cases where the overseas investor holds the reinvestment for less than 5 years (60 months) and recovers all or part of the direct investment), the tax credit amount shall be adjusted.

Illustrative Example: In October 2025, overseas investor Company A received RMB 10 million in distributed profits from domestic Company Jia and reinvested the entire amount as a capital increase in Company Jia, meeting the tax credit policy conditions. Assuming the overseas investor selected a 10% credit rate, the tax credit amount formed was RMB 1 million. In July 2027, Company A recovered RMB 7 million of the reinvestment. In addition to paying the deferred dividend EIT of RMB 700,000, Company A must also reduce the tax credit amount by RMB 700,000, resulting in an adjusted creditable amount of RMB 300,000.

Q5: How is the late payment surcharge calculated when supplementary tax payments are required?

Answer: Where an overseas investor does not meet the conditions of the tax credit policy but actually enjoyed the credit policy resulting in underpaid tax (including cases where the overseas investor holds the reinvestment for less than 5 years (60 months) and recovers all or part of the direct investment, requiring supplementary tax payment), the late payment surcharge shall be calculated from the date the tax credit policy was enjoyed (i.e., the date on which the tax was offset).

Illustrative Example: In October 2025, overseas investor Company A received RMB 10 million in distributed profits from domestic Company Jia and reinvested the entire amount as a capital increase in Company Jia, meeting the tax credit policy conditions. Assuming the overseas investor selected a 10% credit rate, the tax credit amount formed was RMB 1 million. On July 1, 2026, Company Jia paid RMB 6 million in royalties to Company A, and on July 2 filed to offset RMB 600,000 in tax. In January 2027, Company A recovered RMB 5 million of the reinvestment. In addition to paying the deferred dividend EIT of RMB 500,000, Company A must also adjust the credit amount to RMB 500,000 and pay the RMB 100,000 in tax by which the already-offset amount (RMB 600,000) exceeds the adjusted credit amount (RMB 500,000), with the late payment surcharge calculated from July 2, 2026.

Q6: How should "creditable tax payable" be understood?

Answer: The creditable tax payable of an overseas investor must simultaneously satisfy the following conditions: (a) it is EIT payable on income derived from the same profit-distributing enterprise; (b) the type of income is dividends, interest, royalties, or similar; and (c) the income was derived after the time of reinvestment.

Illustrative Example: In March 2026, overseas investor Company A received distributed profits from domestic Company Jia and reinvested the entire amount domestically, meeting the tax credit policy conditions. Assuming the overseas investor selected a 10% credit rate, the tax credit amount formed was RMB 1 million. In 2027, Company Jia paid RMB 6 million in royalties to Company A, with withholding tax payable of RMB 600,000. This royalty income was derived from Company Jia, is a qualifying type of income, and was derived after March 2026. Therefore, the tax payable by Company A on this income constitutes "creditable tax payable."

Q7: Where an overseas investor makes reinvestment in a currency other than RMB, how is the tax credit amount calculated?

Answer: Where an overseas investor makes reinvestment in a currency other than RMB, the reinvestment amount shall be converted to RMB at the middle exchange rate on the date of actual payment to calculate the deferred dividend EIT and the tax credit amount.

Illustrative Example: On October 15, 2025 (USD/RMB middle rate: 1:7), overseas Company A received USD 10 million in distributed profits from domestic Company Jia, and on October 20, 2025 (USD/RMB middle rate: 1:7.1) reinvested the entire amount in domestic Company Bing, meeting the tax credit policy conditions. Without considering any tax treaty or arrangement, converting at the middle exchange rate on October 20 (the date the investment payment was actually made), Company A's deferred dividend EIT and tax credit amount for this reinvestment are both RMB 7.1 million.

Q8: When an overseas investor recovers a direct investment that enjoyed the tax credit policy, how should the tax matters be handled?

Answer: When an overseas investor recovers all or part of a direct investment that enjoyed the tax credit policy, it is necessary to distinguish whether the tax credit policy conditions are met, calculate the tax payable and late payment surcharges based on different circumstances, and file tax returns as required.

Illustrative Example: On March 1, 2026, overseas investor Company A received RMB 10 million in distributed profits from domestic Company Jia in Location X and invested the entire amount in domestic Company Yi in Location Y, meeting the tax credit policy conditions. Assuming the overseas investor selected a 10% credit rate, the tax credit amount formed was RMB 1 million. In 2027, Company Jia paid RMB 6 million in royalties to Company A, offsetting RMB 600,000 in tax. On June 1, 2028, Company A recovered RMB 1 million of the investment in Company Yi. On June 1, 2031, Company A recovered RMB 9 million of the investment in Company Yi.

Tax calculation: On June 1, 2028, Company A recovered RMB 1 million of its investment in Company Yi. Since the reinvestment holding period was less than 5 years, the conditions for the tax credit policy are not met, and the credit amount must be reduced by RMB 100,000. At the same time, Company A must pay deferred dividend EIT of RMB 100,000, which may be offset using the remaining tax credit balance of RMB 300,000 (RMB 900,000 credit amount minus the RMB 600,000 already offset), resulting in no tax payment due. After the offset, the remaining credit balance is RMB 200,000.

Tax filing: Company A shall submit the PRC Enterprise Income Tax Withholding Report (中华人民共和国扣缴企业所得税报告表) to the competent tax authority in Location X, declaring dividend income EIT payable of RMB 100,000, selecting domestic law preference code 0004081525 as the tax incentive, and entering RMB 100,000 as the incentive amount. Concurrently, Company A shall file the Overseas Investor Reinvestment Tax Credit Information Report (境外投资者再投资税收抵免信息报告表), offsetting RMB 100,000 of tax payable.

On June 1, 2031, Company A recovered RMB 9 million of its investment in Company Yi. Since the reinvestment holding period has exceeded 5 years, Company A must pay deferred dividend EIT of RMB 900,000, which may be offset by the remaining credit balance of RMB 200,000, with RMB 700,000 in deferred tax payable.

Tax filing: Company A shall submit the PRC Enterprise Income Tax Withholding Report to the competent tax authority in Location X, declaring supplementary deferred dividend EIT of RMB 900,000, selecting domestic law preference code 0004081525 as the tax incentive, and entering RMB 200,000 as the incentive amount, with RMB 700,000 in tax payable. Concurrently, Company A shall file the Overseas Investor Reinvestment Tax Credit Information Report, offsetting RMB 200,000 of tax payable.

Q9: Where the direct investment recovered by an overseas investor includes investments that both enjoyed and did not enjoy the tax credit policy, how is the order of investment recovery determined?

Answer: When an overseas investor recovers a direct investment, the order of recovery is determined as follows: investments that enjoyed the tax credit policy — qualifying investments that did not actually enjoy the tax credit policy — investments that enjoyed the tax deferral policy but did not qualify for the tax credit policy — other investments. For investments of the same type, recovery is confirmed in chronological order of investment date.

Illustrative Example: Overseas investor Company A has a series of investment and disposal transactions in China:

1. January 2015: Invested RMB 50 million to establish a wholly-owned domestic subsidiary Company Jia.

2. April 2024: Received RMB 10 million in distributed profits from Company Jia and reinvested the entire amount in Company Jia, enjoying the tax deferral policy.

3. May 2025: Received RMB 10 million in distributed profits from Company Jia and reinvested the entire amount in Company Jia, enjoying the tax deferral policy and meeting the tax credit policy conditions.

4. June 2026: Offset RMB 500,000 of EIT withheld on royalties paid by Company Jia.

5. July 2027: Received RMB 10 million in distributed profits from Company Jia and reinvested the entire amount in Company Jia, enjoying the tax deferral policy and meeting the tax credit policy conditions.

6. January 2030: Recovered RMB 41 million of investment from Company Jia.

Among the above transactions, Transaction 3 is an investment that enjoyed the tax credit policy; Transaction 5 is an investment that met the tax credit policy conditions but did not actually enjoy the policy; Transaction 2 is an investment that enjoyed the tax deferral policy but did not qualify for the tax credit policy; Transaction 1 is other investment. Therefore, Company A confirms the order of investment recovery as: Transaction 3 — Transaction 5 — Transaction 2 — Transaction 1.

Q10: Where an overseas investor partially disposes of multiple reinvestments that enjoyed the tax credit policy, how is the tax payable calculated?

Answer: Where an overseas investor recovers all or part of a direct investment that enjoyed the tax credit policy while the investment has been held for less than 5 years (60 months), in addition to paying the deferred tax as required, the overseas investor's tax credit amount shall be proportionally reduced. Where the recovered direct investment includes investments that both enjoyed and did not enjoy the tax credit policy, the investments that enjoyed the tax credit policy are deemed to be disposed of first.

Illustrative Example: In March 2023, overseas investor Company A received RMB 10 million in distributed profits from domestic Company Jia and reinvested the entire amount as a capital increase in Company Jia, enjoying the tax deferral policy.

In October 2025, Company A received RMB 10 million in distributed profits from domestic Company Jia and reinvested the entire amount in Company Jia, enjoying the tax deferral policy and meeting the tax credit policy conditions. Assuming Company A selected a 10% credit rate, the tax credit amount formed was RMB 1 million.

In March 2027, Company A received royalty income from Company Jia, generating tax payable of RMB 600,000, which was fully offset using the reinvestment tax credit amount.

In January 2028, Company A received RMB 20 million in distributed profits from domestic Company Jia and reinvested the entire amount in Company Jia, enjoying the tax deferral policy and meeting the tax credit policy conditions. Assuming Company A selected a 10% credit rate, the tax credit amount formed was RMB 2 million.

In July 2028, Company A recovered RMB 15 million of its investment in Company Jia. This is deemed as first disposing of the RMB 10 million investment from October 2025, then disposing of RMB 5 million from the RMB 20 million investment in January 2028. Since both reinvestments were held for less than five years, the tax credit amount is reduced by RMB 1.5 million. The adjusted tax credit amount is 1,500,000 - 600,000 = RMB 900,000. The deferred dividend EIT payable on the recovered reinvestment is RMB 1.5 million, which may be offset by the adjusted credit amount of RMB 900,000, resulting in tax payable of RMB 600,000.

Q11: If an overseas investor enjoys the tax credit policy under the MOF/STA Announcement and still has a remaining credit balance after December 31, 2028, how should this be handled?

Answer: The MOF/STA Announcement provides that the tax credit policy shall be implemented from January 1, 2025 through December 31, 2028. It also specifies that where an overseas investor still has a remaining credit balance after December 31, 2028, it may continue to enjoy the credit until the balance is reduced to zero.

Illustrative Example: In December 2025, overseas investor Company A used RMB 10 million in distributed profits from domestic Company Jia to establish a new enterprise in China. Assuming Company A selected a 10% credit rate, the tax credit amount formed was RMB 1 million. As of December 31, 2028, Company A's remaining tax credit balance was RMB 400,000. In January 2029, Company A derived interest income from Company Jia, generating tax payable of RMB 400,000, which may be offset using the tax credit amount. After the offset, Company A's reinvestment credit balance is zero.

Q12: For qualifying investments made by overseas investors between January 1, 2025 and the date the MOF/STA Announcement was issued, how should the tax credit policy be applied?

Answer: For qualifying investments made by overseas investors between January 1, 2025 and the date the MOF/STA Announcement was issued, the overseas investor may apply for retroactive enjoyment of the tax credit policy. However, the tax credit amount formed from reinvestment amounts during this period may only be used to offset qualifying tax payable arising after the date the MOF/STA Announcement was issued.

Illustrative Example: In February 2025, overseas investor Company A received RMB 10 million in distributed profits from domestic Company Jia and reinvested the amount domestically, enjoying the tax deferral policy. In March 2025 (before the MOF/STA Announcement was issued), Company A derived royalty income from Company Jia and paid EIT of RMB 600,000. Company A may apply for retroactive enjoyment of the tax credit policy for the February 2025 reinvestment of RMB 10 million. Assuming the overseas investor selected a 10% credit rate, the tax credit amount is RMB 1 million. In January 2026 (after the MOF/STA Announcement was issued), Company A again derived royalty income from Company Jia, generating tax payable of RMB 300,000. Under the MOF/STA Announcement, the RMB 1 million tax credit amount may not be used to offset the RMB 600,000 in royalty tax already withheld in March 2025, but may be used to offset the RMB 300,000 in royalty tax payable arising in January 2026.