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12 January 2018 China announces withholding tax deferral treatment on direct reinvestment On 21 December 2017, China's Ministry of Finance (MOF), State Administration of Taxation (SAT), National Development and Reform Commission and Ministry of Commerce (MOFCOM) jointly issued Caishui [2017] No. 88 (Circular 88) to formally introduce the withholding tax (WHT) deferral rules on foreign investor's reinvestment of Chinese profits. Pursuant to Circular 88, foreign investors would be eligible for the WHT deferral treatment if they directly reinvest the attributable/distributable profits from their Chinese subsidiaries in China (Reinvested China Profits), if the following four conditions are met:
2) Reinvested China Profits should be of equity investment income, i.e., declared dividends or realized retained earnings of Chinese subsidiaries. 3) Reinvested China Profits must be directly paid or transferred to a Chinese subsidiary and/or the third party disposing of its equity interest in the Chinese subsidiary. 4) Reinvestments must be made to one of the designated encouraged industries under the Foreign Investment Industrial Guidance Catalog and/or the Catalog of Priority Industries for Foreign Investments in the Central and Western Regions. If the foreign investor qualifies for the WHT deferral treatment, the Chinese subsidiary should submit the required documents to its tax authorities on behalf of its foreign investor. Upon completion of the filing, the Chinese subsidiary suspends withholding or payment of the corresponding WHT. The Chinese tax authority retains the right to assess and examine the foreign investor's eligibility for the WHT deferral treatment. Failure for the foreign investor to meet the conditions will subject both the foreign investor and the Chinese investee company (in the capacity as the withholding agent) to late payment interest and penalties. If the foreign investor that qualified for the WHT deferral treatment disposes the Chinese investment through a transfer, liquidation or any other methods in the future, the foreign investor is subject to a claw-back rule to repay the WHT within seven days upon receipt of the consideration. However, if the disposition of the Chinese investment qualifies for tax deferral treatment, the foreign investor could continue to enjoy the WHT deferral treatment. Circular 88 is retroactively effective as of 1 January 2017. A foreign investor may apply for a tax refund within three years of the WHT payment, if it is eligible for the WHT deferral treatment but has not received the benefit. With an aim to encourage foreign investment in China, Circular 88 offers a tax-efficient cash redeployment option in China. Foreign investors may consider funding their Chinese investments with their China profits. However, each foreign investor's foreign tax credit position should be taken into account when determining whether this funding method is more beneficial.
Document ID: 2018-5123 |
