Foreign Investors Utilizing Distributed Profits for Direct Investment

The Ministry of Finance and the State Administration of Taxation jointly issued the Announcement [2025] No. 2 on the Tax Credit Policy for Foreign Investors Utilizing Distributed Profits for Direct Investment. This Announcement stipulates the tax credit policy for foreign investors who reinvest profits distributed by Chinese resident enterprises. The core provisions are as follows.

Foreign investors who utilize distributed profits from Chinese resident enterprises for qualified direct investments within China, within the period from January 1, 2025, to December 31, 2028, are eligible to offset 10% of the investment amount against their current year's payable enterprise income tax. This payable tax refers to the enterprise income tax levied on income such as dividends, profits, interest, and royalties derived by the foreign investor from the profit-distributing enterprise after the date of the profit distribution for reinvestment.

Any unused credit in the current year may be carried forward to subsequent years. If a tax treaty between the Government of the People's Republic of China and a foreign government stipulates a lower applicable tax rate on dividends, profits, and other equity investment income, the treaty rate shall apply.

A fundamental condition for enjoying this policy is that the foreign investor must continuously hold the domestic direct investment for a minimum period of 5 years (60 months). Different tax consequences apply upon recoupment of the investment, depending on whether this holding period is met.

If the investment is recouped after fulfilling the 5-year (60-month) holding period, the foreign investor is required to report the distributed profit corresponding to the recouped investment portion to the tax authority and pay the deferred tax. Any remaining balance of the reinvestment tax credit may still be used to offset other payable taxes.

If the investment is recouped before completing the 5-year (60-month) holding period, the distributed profit corresponding to the recouped portion will be deemed not to have met the preferential policy conditions. Consequently, the foreign investor must not only pay the deferred tax but also proportionally reduce the eligible tax credit amount. If the tax credit already utilized exceeds this adjusted amount, the foreign investor must pay the excess tax amount.