New tax incentive for overseas investors investing in the PRC
On December 21, 2017, the Ministry of Finance, the State Administration of Taxation (SAT), the National Development and Reform Commission and the Ministry of Commerce jointly issued tax circular Cai Shui  No. 88, Circular on Policy Issues Concerning Provisionally Not Levying Withholding Income Tax on Direct Investments by Foreign Investors Made Using Distributed Profits, which provides a temporary waiver of enterprise income tax for non-tax-resident enterprises that make direct investments in an encouraged industry with profits distributed by a tax-resident enterprise in the PRC (Tax Deferral), if certain conditions are met. Subsequently, on January 2, 2018, the SAT issued the SAT Announcement  No.3, Announcement on Issues Relevant to the Implementation of the Policy of Provisionally Not Levying Withholding Income Tax on Direct Investments Made by Foreign Investors Using Distributed Profits in order to provide further guidance in this regard.Both Circular 88 and Announcement 3 have a retrospective effect from January 1, 2017, which means that the Tax Deferral applies to dividends or profit distributions derived by overseas investors from their equity investments in the PRC on and after January 1, 2017. The issuance of the rules in relation to the Tax Deferral is definitely a positive signal for overseas investors with investment in China, especially for the ones which have intention to expand their Chinese investment. Also, it shows the Chinese government’s resolution to attract more foreign capital flows and it is reasonably anticipated that more foreign capital will be retained in China for further investment.