Temporary Exemption of WHT on Profits Reinvested by Foreign Investors

境外投资者以分配利润直接投资暂不征收预提所得税

Caishui [2018] No.102 — Circular on Extending the Application Scope of Temporarily Deferring Withholding Tax for Direct Investment with Distributed Profits by Foreign Investors. Issued September 29, 2018.

Sources:

• Chinese text: 国家税务总局政策法规库 (STA)
• English Q&A: State Taxation Administration, Guangdong Provincial Tax Service

All information in this document is authentic in Chinese. English is provided for reference only. In case of any discrepancy, the Chinese version shall prevail.

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Q&A: Reinvestment WHT Deferral Policy

1. What is the reinvestment WHT deferral policy?

Under the EIT Law, non-resident enterprises receiving dividends from China-sourced equity investments are generally subject to 10% withholding tax (or a lower rate under an applicable tax treaty).

To encourage foreign investors to expand investment in China, the government introduced a "reinvestment deferral" policy: foreign investors who directly reinvest distributed profits from Chinese resident enterprises may temporarily defer the withholding income tax, provided certain conditions are met.

2. What are the key documents?

3. Who is eligible?

The policy applies to non-resident enterprises (as defined in the EIT Law) — i.e., foreign corporate investors. Individual foreign investors are not eligible.

4. What conditions must be met?

All four conditions must be satisfied simultaneously:

1. Direct equity investment — the profits must be used for:

   • Increasing paid-in capital or capital reserves of an existing Chinese resident enterprise
   • Setting up a new resident enterprise in China
   • Acquiring equity in an existing resident enterprise from an unrelated party
   • Other forms specified by MOF/STA

2. Source of profits — the distributed profits must be dividends or equity investment income from realized retained earnings (including undistributed earnings from previous years)

3. Direct transfer — funds must be transferred directly from the profit-distributing enterprise to the invested enterprise or equity transferor (no intermediate routing)

4. Non-forbidden investment — the reinvestment must be in projects/sectors not forbidden to foreign investment under the applicable Negative List

5. Can deferred profits supplement previously committed registered capital?

Yes. Using distributed profits to supplement previously promised registered capital contributions qualifies as "increasing paid-in capital" under the policy, provided all other conditions are met.

6. How to apply for the deferral?

Three parties have responsibilities:

Foreign investor:

• Complete the "Non-resident Enterprise WHT Deferral Information Reporting Form"
• Submit evidence that the reinvestment falls within permitted scope (before exiting or when paying deferred tax)

Profit-distributing enterprise:

• Verify the foreign investor's information
• Complete its section of the reporting form
• File with tax authorities within 7 days of profit distribution

Tax authorities:

• Process the filing

7. When must the deferred tax be paid?

1. Upon exit — when the foreign investor exits the investment (equity transfer, buyback, liquidation), the deferred WHT must be paid within 7 days of receiving the payment

   • If the invested enterprise undergoes a qualifying reorganization, the deferral can continue
   • Partial disposals are deemed to dispose of the deferred-tax portion first (FIFO)

2. Non-compliance — if the tax authorities later determine that conditions were not met:

   • If caused by the distributing enterprise: it is liable for failure to withhold
   • If caused by the investor: deemed as unpaid tax from the original distribution date

8. Can the deferral be claimed retroactively?

Yes. Foreign investors who qualified but did not apply for the deferral may claim it retroactively and request a refund within three years from the date the tax was paid.

9. Can tax treaty benefits apply when paying the deferred tax?

Yes. When paying the deferred WHT, the foreign investor may apply for tax treaty benefits. The applicable treaty is the one in effect at the time the dividends were originally distributed, unless a subsequently concluded treaty provides otherwise.