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LEGAL: Deferral of Withholding Tax on Distributed Profits Re-invested by Foreign Investors for Direct Investment
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Deferral of Withholding Tax on Distributed Profits Re-invested

by Foreign Investors for Direct Investment

BT 201804 Legal 02为优化外资在中国的经营环境,国务院曾于去年出台《关于促进外资增长若干措施的通知》,其中最引人关注的财税支持政策之一就是对境外投资者从中国境内居民企业分配的利润直接投资于鼓励类投资项目,凡符合规定条件的,实行递延纳税政策,暂不征收预提所得税。接着,在2017 年年末,政部、国家税务总局、国家发展改革委及商务部献上岁末大礼,联合发布了境外投资者翘首以待的《关于境外投资者以分配利润直接投资暂不征收预提所得税政策问题的通知》2(财税[2017]88 号)。通知对上述递延纳税优惠的适用条件、享受优惠的程序和责任、后续管理等做出了具体规定,并明确该递延纳税优惠追溯自 2017 年 1 月 1 日起执行,符合条件的已缴税款可予以退税。

此次递延纳税优惠政策的出台是中国吸引外资政策的一项重大利好。对于已在华开展投资并已在华产生利润的境外投资者,应积极审视评估集团现行的投资战略并进行相应的调整以充分利用这一优惠政策,同时也应密切关注该递延纳税优惠政策的地方执行口径,提前做好准备。

境外投资者如需适用递延纳税优惠必须同时满足以下四个条件。一、直接投资。这是指境外投资者以分得利润进行的直接增资、新建、股权收购等权益条件。二、实际分配。对于境外投资者分得的利润,应属于中国境内居民企业向境外投资者实际分配已经实现的留存收益而形成的股息、红利等权益性投资收益。三、直接支付。根据通知,无论是以现金形式还是非现金(例如实物、有价证券等) 形式分配的利润,均必须直接从利润分配企业转入被投资企业或股权转让方,任何中间周转的形式均不能享受递延纳税优惠。四、鼓励类投资项目境外投资者应投资的鼓励类投资项目包括了《外商投资产业指导目录》所列的鼓励外商投资产业目录以及《中西部地区外商投资优势产业目录》范围内的经营活动。

这一利好消息显示出了中国政府吸引外资的决心,然而也需要注意的是,执行层面还有很多尚待明确的问题。预计税务总局可能会出台后续文件,从执行层面对通知的相关规定予以明确。我们也会密切关注相关政策发展,并适时分享观察。

BT 201804 Legal 04China is experiencing a certain decrease in foreign investment resulting, amongst other reasons, from increasing labour and other costs. The State Administration of Taxation (“SAT”), the Ministry of Finance, the Ministry of Commerce and the National Development and Reform Commission, have jointly launched a new tax preferential policy for overseas investors. Cai Shui (2017) No. 88, Circular on Policy Issues concerning Temporarily Not Levying the Withholding Tax on Distributed Profits Used by Overseas Investors for Direct Investments (“Circular 88”) in order to boost the economy, further encourage foreign investments, and promote continuing operations within China on a long-term basis. The new tax policy allows foreign investors to temporarily defer the withholding taxes on distributed profits that are re-invested directly into China, if certain conditions are met. For example, if an overseas investor uses profits distributed from its Chinese subsidiary and increases paid-in capital of the subsidiary or contributes said funds to establish a new subsidiary in China, the tax on such distributed profit will be deferred under certain conditions. If the conditions change (i.e. the investor withdraws the investment or no longer meets the requirements), withholding taxes will be due and supplementary tax payment will need to be made. The below sections further explain and analyze the relevant regulations, scope, responsibilities and procedures in detail.
 

Subsequent to the issuance of Circular 88, SAT issued an announcement on the Implementation of the Policy of Temporarily Not Levying the Withholding Tax on Distributed Profits Re-invested by Foreign Investors for Direct Investment (“Announcement 3”). It further specifies the implementation procedures in different circumstances, the corresponding supporting documents required as well as the reporting and filing obligations.
 

Following sections provide a nutshell of Circular 88 and Announcement 3 and the potential tax impact on non-resident enterprises that have an investment in China -
 

1. Background

According to general Chinese tax laws and regulations, profits distributed from Chinese resident enterprises (“Profit Distributor”) to foreign investors are subject to Enterprise Income Tax (“EIT”) at 10%. However, foreign investors could be eligible to enjoy a preferential tax rate for dividends in accordance with different double taxation agreements between China and the relevant country (“DTA”). The EIT payable shall be withheld at source and the Profit Distributor is the withholding agent.

BT 201804 Legal 062. Tax deferral policy and requirements

According to Circular 88, where an overseas investor makes a direct investment in a Chinese resident company under the encouraged category (“Invested Enterprise”) with profits proceeding from the Profit Distributor, a tax deferral policy on profit distribution may apply provided that the following requirements are fulfilled concurrently:
 

a) Direct investment made by an overseas investor may refer to the following conditions:
 

- Directly increasing or increasing by transferring paid-in capital or capital reserves (“Capital Increase”) in an existing Chinese resident enterprise;

- Establishing a new resident enterprise within the territory of China;

- Acquiring equities of a Chinese resident enterprise from a non-related party (“Acquisition”);

- Other forms of investment specified by the Ministry of Finance and the State Administration of Taxation.
 

Please note that the aforementioned Capital Increase and Acquisition exclude shares from listed companies, unless they meet certain conditions as strategic investment.
 

b) Profits obtained by an overseas investor refer to returns on equity investment, such as dividends and bonus generated from retained income that has been actually distributed by the Profit Distributor to the foreign investor.
 

c) Where the direct investment is paid in cash, the said payment shall be directly made from the Profit Distributor into the account of the Invested Enterprise or the party that sells equities. The cash payment shall not be paid into any other foreign or domestic account prior to the direct investment; where the direct investment is paid in non-cash forms, such as by means of a contribution in kind, or securities, the ownership of relevant assets shall be directly transferred from the Profit Distributor to the Invested Enterprise or the party that sells the equities. Non-cash payment shall not be held by any other enterprise or individual on a commission or temporary basis.
 

d) Business activities carried out by the Invested Enterprise must be under the encouraged category, including:
 

- category of industries to which foreign investors are encouraged to enter, as listed in the Catalog for the Guidance of Foreign Investment Industries; and

- Catalog of Priority Industries for Foreign Investment in the Central-Western Region.

BT 201804 Legal 053. Documentation and reporting

3.1 Obligations of foreign investors

Obligations of the foreign investor may vary subject to the following circumstances:
 

- If the foreign investor is eligible for the tax deferral policy, the foreign investor shall submit the Reporting Form on the Information Concerning the Deferral Withholding Tax of Non-resident Enterprise (“Reporting Form”) to the Profit Distributor;

- If the foreign investor has already settled the withholding tax payments on profit distribution but would like to resume the eligibility for tax deferral, the foreign investor shall submit the Reporting Form, the related contracts, payment evidences, the information related to the encouraged investment and other required documents to the competent tax authority of the Profit Distributor; or

- If the foreign investor is obliged to underpaid taxes, the foreign investor shall submit the Reporting Form to the competent tax authority of the Profit Distributor.
 

3.2 Obligations of the Profit Distributor

The Profit Distributor shall review and correct (if necessary) the Reporting Form provided by the foreign investor (“Reviewed Reporting Form”) so as to ensure the complexity, accuracy and authenticity. After the comprehensive review, the Profit Distributor shall submit the Reviewed Reporting Form and the Reporting Form on Withholding EIT to its competent tax authority within 7 days of the actual payment on profit distribution.
 

In case the Profit Distributor fails the reviewing responsibilities and result in incorrect application of the tax deferral policy, the competent tax authority of the Profit Distributor may impose late interest payment and penalties on the Profit Distributor.
 

3.3 DTA for withholding tax on profit recovered

If the re-investment is withdrawn or the requirements for the tax deferral are not satisfied any more, the deferral withholding taxes will need to be settled with the competent tax authority of the Profit Distributor. However, investors may enjoy preferential withholding tax rate under DTA, which was in force when the profits were paid. In other words, subsequent provisions of DTA, which prevail after the payment of profits, may not be applicable.
 

3.4 Agent

The overseas investors and the Profit Distributor may authorize an agent to handle specific tax matters herein, but a written Letter of Power of Attorney must be provided to the competent tax authority for this purpose.
 

Conclusion

The new tax deferral policy on withholding tax has been an important and obvious incentive for foreign investors who have existing businesses in China. Such foreign investors are encouraged to take a review of their current investment strategy and make an adjustment to business arrangements if necessary so as to better enjoy the tax preferential policy. At the same time, investors need to keep a close contact with the in-charge tax authority to obtain a better understanding of implementation procedures and prepare in advance.
 

There are still certain implementation issues that need to be further defined and clarified through cooperation and coordination with the in-charge tax authority, such as whether the tax deferral policy is applicable to all kinds of re-investments, such as re-investing the profits obtained from a liquidation into a new company, and the relationship between tax deferral policy and double tax treaties. It is foreseeable that SAT will come up with subsequent regulations to clarify these implementation issues. We will closely track the relevant policy development and share our insights in time.

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