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China Offers Investors New Tax Incentive

China Offers Investors New Tax Incentive

Canadians investing in China may be interested in a new Chinese withholding tax deferral.


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According to China's recently released Circular 88, foreign investors who use distributed profits from companies resident in China to reinvest in certain Chinese "encouraged projects" will be entitled to a withholding tax deferral, provided certain conditions are met.

Encouraged projects are detailed in the following Chinese publications: Foreign Investment Industry Guidance Catalogue or Superiority Industry Catalogue for Foreign Investments in Central and Western Regions.

The incentive is retroactive from January 1, 2017. Those who qualify but who have already paid their withholding tax can retroactively apply for the benefit and claim the tax refunds within three years of the payment.

Qualifying investments
To qualify for the tax deferral, foreign investors must use profits distributed from the realized retained earnings of companies resident in China for equity investment in an enterprise that engages in "encouraged projects". Qualifying equity investments include:

  • Increases of paid-in capital or capital reserves of resident enterprises in China
  • Setting up newly incorporated resident enterprises in China
  • Acquiring shares of resident enterprises in China from unrelated parties.

Furthermore, qualifying profit reinvestments must be transferred directly to an invested enterprise or equity transferor's account (without the use of an intermediary).

Non-qualifying investments
The incentive will not apply if a relevant foreign investor uses distributed profits to:

  • Increase any publicly listed company's paid-in-capital or capital reserves
  • Acquire shares in publicly listed companies (unless the investment is a qualifying state-approved strategic investment)
  • Acquire shares from related parties.

For more information, contact your KPMG adviser.

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