Skip to Content
Chinese tax changes.
Article

China issues rules for tax-deferred dividend distributions

January 25, 2018 / 2 min read

Circular 88 provides an incentive for foreign investors who plan to use the profits generated in China for reinvestment in "encouraged projects." Here's what you need to know.

In an effort to further encourage investment in China, the Chinese Tax Administration (SAT) has initiated rules that allow for the deferral of withholding taxes on certain dividends as long as they are reinvested in an encouraged Chinese entity. These rules, which were recently released in the SAT’s Circular 88, are effective immediately.

Requirements for tax deferral treatment

The withholding taxes on these distributions / reinvestments can be deferred provided that all of the following conditions are met:

Pre-recording and post-management

The SAT requires a “pre-recording and post-management” method for foreign investors who plan to utilize the deferral option, which includes the following:

Effective date

Circular 88 is effective immediately and may be applied retroactively to January 1, 2017. Any foreign investors who have paid withholding tax but who are eligible for the tax deferral benefit can claim tax payments within three years of the original payment date for withholding taxes paid.

Any foreign investors who have paid withholding tax but who are eligible for the tax deferral benefit can claim tax payments within three years of the original payment date.

Open questions and tax deferral versus tax exemption

Circular 88 specifies the conditions for tax deferral treatment, the effective date, and the consequences of noncompliance. There are also several areas in the new rules that require further clarification including the applicability of these rules to non-corporate entities and how the rules apply to certain sale, merger, or other transactions.

It is important to note that the taxes on profit distributions used for reinvestment are tax deferred, not exempt from taxation. As such, foreign investors that subsequently sell or liquidate holdings in China that previously received tax deferral are required to pay the taxes due within seven days.

Who are qualified foreign investors?

According to Article 9 of Circular 88, non-resident companies as defined in China's corporate income tax law are eligible. As such, it may be difficult for other foreign investors (such as individuals, partners, trusts, and other investment entities) to apply for tax deferral.

What is included in profit distributions?

According to the SAT, profit distributions include retained earnings derived from the effective date as well as prior to the effective date of Circular 88 but not yet distributed.

Related Thinking

Exterior photo of Hexagon Manufacturing Intelligence's new headquarters in Novi, MI, USA
September 17, 2024

Manufacturer right-sizes real estate portfolio after growth through acquisitions

Case Study 2 min read
University of Michigan Rowing Association new location, view from above
August 23, 2024

Plante Moran Realpoint helps nonprofit negotiate building purchase after successful lease & buildout

Case Study 1 min read
Apartment condos under construction. Development of residential housing. Real estate market in the USA.
August 20, 2024

Michigan’s historic $100 million investment in affordable housing

Article 4 min read