10% Tax Credit for Foreign Investors Reinvesting Profits in PRC

Under China’s Corporate Income Tax Law, dividends are generally subject to 10% withholding tax, unless a more favorable rate can be accessed through a relevant tax treaty. To encourage foreign investors to invest in China, Chinese authorities allow foreign investors to defer payment of tax on dividends distributed from Chinese resident enterprises for their direct investments with the distributed dividends, subject to satisfaction of specific conditions.

In order to further attract foreign capital into China, Chinese authorities announced a new policy on June 30, 2025, granting foreign investors 10% tax credit for their dividend investment to Chinese resident enterprises during the period from January 1, 2025 to December 31, 2028. Specifically, if a foreign investor makes direct investment within China, between January 1, 2025 and December 31, 2028, by using the dividends distributed from Chinese resident enterprises, meeting the tax credit criteria (as discussed below), it may deduct 10% of its investment amount from tax payables of the current year and, if not fully deducted, carry forward the remaining deductible credit to next years until it has been used up (even after December 31, 2028).

Tax Credit Criteria

he following conditions must be satisfied if foreign investors seek to enjoy the tax credit:

(1) The dividends to be used for investment are equity investment gains arising from retained earnings distributed by Chinese resident enterprises;

(2) The distributed dividends are used for the following investments (excluding investments to public companies, except for qualified strategic investments as per the Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors):

a) increase or increase by transferring paid up capital or capital reserves of Chinese resident enterprises;

b) set up new Chinese resident enterprises;

c) acquire equities of Chinese resident enterprises from non-affiliated parties;

(3) the invested Chinese resident enterprises should be engaged in business activities that are listed in the Catalogue of Industries Encouraged for Foreign Investments;

(4) the investments have a lock-up period of at least 5 years (60 months);

(5) the dividends, in a form of either cash or non-cash, must be transferred directly from the Chinese resident enterprises distributing dividends to the invested Chinese resident enterprises.

Deductible Tax Payables

Tax payables deductible by the 10% tax credit are corporate income taxes payable on dividends, interests and royalties that foreign investors gain from the dividend-distributing enterprises after the date of dividend investments.

If the foreign investor withdraws its whole or partial direct investments enjoying the tax credits after expiry of the lock-up period, it is required to pay the deferred tax for the distributed dividends after deducting the remaining credit carried forward (if any) within seven days after its withdrawal.

However, if the foreign investor withdraws its investments earlier, it should settle deferred tax and the deductible tax credits will be reduced proportionately. In the extreme scenario that the tax credit that the foreign investor has used exceeds the reduced credit, the foreign investor is obliged to pay back the deducted taxes within seven days after its withdrawal.

Filing Requirements

Chinese resident enterprises, after receiving information and materials from the foreign investor about the dividend investments, may defer the payment of withholding tax on invested dividends, and apply to local tax authority for tax deduction when paying to the foreign investor dividends, interests and royalties.

Qualifying foreign investors are required to report their dividend investment information to local commerce authorities through invested resident enterprises. They will receive Dividend Investments Form after confirmation by provincial commerce authorities. Such reporting requirements are also appliable when the foreign investors withdraw their investments.

Restrosepctive Treatment

Qualifying dividend investments occurred after January 1, 2025 but prior to the policy announcement date are eligible for the tax credit treatment. Foreign investors may apply for tax credit and deduction after the policy announcement date.