China has introduced a new withholding tax deferral scheme to provide tax breaks for foreign companies that directly reinvest dividends into certain industries.
Cai Shui [2017] No. 88 enables multinational corporations (MNCs) to defer paying tax on dividends from Chinese enterprises if they are directly reinvested into industries promoted by the Chinese government. The measure is intended to provide incentives for MNCs to adopt a longer-term approach and keep their earnings in the country by encouraging them to invest in local expansion.
The tax deferral under Cai Shui [2017] No. 88 applies to dividends paid out from 1 January 2017 onwards. MNCs that have already paid withholding tax on dividends distributed after this date also now have a three-year window to claim tax refunds – provided that the dividends qualify for the scheme.
MNCs are generally eligible for the withholding tax deferral scheme if they meet the following criteria:
- They use the dividends for direct investment purposes. In other words, they need to use equity investments to undertake activities such as injecting further capital into an existing Chinese enterprise or forming a new Chinese enterprise (invested enterprises);
- They directly transfer cash dividends, and dividends in the form of securities, from their bank account into that of the enterprise they wish to invest in;
- Dividends are distributed directly from their accumulated earnings. Although Cai Shui [2017] No. 88 only applies to dividends distributed after 1 January 2017, the earnings from which the dividends are distributed do not necessarily have to have been realised after that date;
- The enterprise that is being invested in must be active in an industry that is on the Chinese government’s list of preferred industries. These include agriculture, mining, manufacturing, transport, financial services and the energy sector.
According to the TMF Group, the withholding tax deferral is not a permanent tax exemption, which means that organisations need to weigh up the possible tax benefits against the value of the time covered by the deferred tax to work out whether or not it makes sense to go down this route.
Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.
China has introduced a new withholding tax deferral scheme to provide tax breaks for foreign companies that directly reinvest dividends into certain industries.
Cai Shui [2017] No. 88 enables multinational corporations (MNCs) to defer paying tax on dividends from Chinese enterprises if they are directly reinvested into industries promoted by the Chinese government. The measure is intended to provide incentives for MNCs to adopt a longer-term approach and keep their earnings in the country by encouraging them to invest in local expansion.
The tax deferral under Cai Shui [2017] No. 88 applies to dividends paid out from 1 January 2017 onwards. MNCs that have already paid withholding tax on dividends distributed after this date also now have a three-year window to claim tax refunds – provided that the dividends qualify for the scheme.
MNCs are generally eligible for the withholding tax deferral scheme if they meet the following criteria:
- They use the dividends for direct investment purposes. In other words, they need to use equity investments to undertake activities such as injecting further capital into an existing Chinese enterprise or forming a new Chinese enterprise (invested enterprises);
- They directly transfer cash dividends, and dividends in the form of securities, from their bank account into that of the enterprise they wish to invest in;
- Dividends are distributed directly from their accumulated earnings. Although Cai Shui [2017] No. 88 only applies to dividends distributed after 1 January 2017, the earnings from which the dividends are distributed do not necessarily have to have been realised after that date;
- The enterprise that is being invested in must be active in an industry that is on the Chinese government’s list of preferred industries. These include agriculture, mining, manufacturing, transport, financial services and the energy sector.
According to the TMF Group, the withholding tax deferral is not a permanent tax exemption, which means that organisations need to weigh up the possible tax benefits against the value of the time covered by the deferred tax to work out whether or not it makes sense to go down this route.
Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.
