Guidance for Foreign Investors to Benefit from Deferral of Dividend Withholding

According to the Ministry of Finance and State Tax Administration Public Notice [2018] No. 102 and the State Tax Administration Public Notice [2018] No. 53, profits distributed to foreign investors from resident enterprises in China, which are used for domestic direct investment, as long as the profits are not invested in prohibited projects or fields, can enjoy the deferral of withholding income tax policy (hereinafter referred to as “the policy”).

Who May Enjoy the Policy?

The policy applies to non-resident enterprises who haven't set up establishments or offices within the jurisdiction of China, or whose dividends have no actual connection with their establishments or offices within the jurisdiction of China (hereinafter referred to as foreign investors).

What Conditions Need to be Satisfied?

To enjoy the policy, the following 3 conditions must be satisfied simultaneously.

Condition 1: Direct Investment

Foreign investors’ direct investment with profit distribution specifically includes:

1.Foreign investors use dividends to increase paid-in capital or capital reserves of resident enterprises of China；

2.Foreign investors invest in new resident enterprises in China;

3.Foreign investors purchase equity of resident enterprises from unrelated parties；

4.Other methods prescribed by the Ministry of Finance and the State Taxation Administration.

Condition 2: Actual Distribution

The profits distributed to foreign investors belong to equity investment income such as dividends formed by the actual distribution of the retained earnings realized by resident enterprises.

Condition 3: Direct Payment

If the profits of foreign investors for direct investment are paid in cash, the cash shall be transferred directly from the account of the profit distribution enterprises to the account of the invested enterprises or the equity transferors, and shall not be transferred to other domestic or overseas accounts before direct investment.

If the profits of foreign investors for direct investment are paid in non-cash forms, such as physical objects or marketable securities, the ownership of the relevant assets shall be transferred directly from the profit distribution enterprises to the invested enterprises or the equity transferors, and shall not be held by other enterprises or individuals on behalf of the foreign investors or just held temporarily before the direct investment. 

What Documents Need to be Filed?

For Foreign Investors

1.When foreign investors apply for the policy, the Information Report of Non-resident Enterprises on Deferred Payment of Withholding Income Tax shall be submitted to the profit distribution enterprises.

2.When foreign investors apply for retroactive enjoyment of the policy, the Information Report of Non-resident Enterprises on Deferred Payment of Withholding Income Tax and other materials for tax refund, such as relevant contracts and payment vouchers, shall be submitted to the competent tax authorities of the profit distribution enterprises. 

3.When foreign investors need to pay the deferred withholding tax under certain circumstances, the Report on Withholding Enterprises Income Tax of the People's Republic of China shall be submitted to the competent tax authorities of the profit distribution enterprises. 

For Profit Distribution Enterprises

The profit distribution enterprises shall file the Report on Withholding Enterprise Income Tax of the People's Republic of China and the Information Report of Non-resident Enterprises on Deferred Payment of Withholding Income Tax completed by both foreign investors and profit distribution enterprises to the competent tax authorities within 7 days after actual payment.

How to Retroactively Enjoy the Policy?

Foreign investors who are qualified for the policy but have already paid withholding tax on distributed profits may apply for a tax refund within 3 years from the date of actual payment of tax.

When to Pay the Deferred Tax?

Foreign investors who have enjoyed the policy and taken back the direct investment substantially through equity transfer, repurchase or liquidation will have to declare and pay the deferred tax to the competent tax authorities according to the prescribed procedures within 7 days after receiving the corresponding amount.

Legal Liabilities

If foreign investors fail to report and pay the enterprise income tax in accordance with the relevant provisions due to the error in the information provided, the investors shall be held liable for deferred payment of tax. The deferred payment of tax shall be calculated from the date of payment of relevant profits.

If you are qualified to apply for the deferral policy of dividend withholding tax, or interested in this policy, please feel free to contact the competent tax authorities.

Note: In case of any discrepancy between the original text and the translation, the original text shall prevail.