by Richard Tan
China’s cabinet, the State Council, on August 16 released a plan to further promote foreign investment into China, including an important new withholding tax deferral for reinvested dividends, an extension of the technological service enterprises tax incentive, and a new tax break for overseas income remitted back to China.
The guidance and roadmap, outlined in a State Council notice, promotes foreign investment from several perspectives besides taxation, including market access, work permits for expatriates, economic development zones, and business environment.
Reinvested dividends tax deferral
As a significant tax incentive, the State Council has proposed to grant a withholding tax deferral for dividends received by foreign investors from their investments in China if such dividends are directly invested in “encouraged categories of industries” and certain requirements can be met.
Such encouraged industry categories are outlined in an updated version of the foreign investment catalogue, which became effective July 2017.
This new incentive would modify current law, which imposes withholding tax on dividends received by foreign investors from China at a 10% rate unless such withholding tax can be reduced by an applicable tax treaty.
The State Council has instructed the Ministry of Finance and the State Administration of Taxation to promulgate detailed implementation rules for this new tax incentive.
Technological service enterprises tax incentive
The State Council has also proposed to extend the enterprise income tax (EIT) incentive applicable to technologically advanced service enterprises (TASEs) engaged in offshore outsourcing services.
Currently, China provides preferential tax treatment on a pilot basis to TASEs that operate in certain cities. The State Council has proposed to extend preferential tax treatment to TASEs that operate anywhere in the country.
Such preferential measures include a reduced 15% EIT rate (compared with the standard EIT rate of 25%), and a higher percentage of deduction quota in relation to employee training expenses.
TASEs must meet certain criteria and undergo a certification procedure to enjoy this preferential tax treatment. Both domestic enterprises and FIEs can apply for the TASE certification.
The State Council said the relevant ministries will release further measures to guide foreign investment to high-tech industries and service industries with high value-added.
Overseas income remitted back to China
In an innovative proposal, the State Council would provide a tax incentive to Chinese enterprises, including regional headquarters in China of multinational enterprises, when overseas income is remitted back to China.
The State Council has not yet set out any further details for this tax incentive.
Business environment improvements
Key non-tax measures in the State Council’s proposal include the following:
- A consolidated law on foreign investment will be promulgated to replace the current (somewhat segmented) legal regime governing foreign investment and will also be integrated into the overall regime of corporate law of China.
- There will be more measures to ensure that profits earned by FIEs in China can be freely remitted out of China in RMB or foreign currency.
- The complaint-filing mechanism available to FIEs will be improved at both the central level and local level to endure that FIEs and foreign investors can obtain national treatment in China.
- Supporting fiscal measures are expected to be taken to encourage multinational enterprises to establish regional headquarters in China and to make investment in designated economic development zones, in particular in the West China and Northeast China.
- Procedures for expatriates to apply for work permits and visas will be more convenient and efficient.
It is expected that various responsible ministries and departments will soon release detailed measures to implement the State Council’s proposal, which will be welcomed by foreign investors.
-Richard Tan is a partner (non-equity) at the Beijing office of Zhong Lun Law Firm and can be reached at: [email protected]. His LinkedIn address is https://www.linkedin.com/in/richard-tan-7862b513/
