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China has enhanced its foreign investment incentives by introducing a tax credit mechanism alongside the existing tax deferral framework. This policy update aims to encourage foreign investors to channel dividends derived from the Chinese enterprises into new qualifying investments within China ("Qualifying Reinvestment").
I. Tax Credit Policy Background
In February 2025, China's State Council approved the 2025 Action Plan for Stabilizing Foreign Investment to counter global economic volatility and address investor demand for tax predictability. This Plan prioritizes three objectives, namely, retaining the existing foreign direct investment, attracting new capital inflows, and enhancing the quality of foreign investment.
In response to such Plan, the key regulatory updates followed:
- In June 2025, the Ministry of Finance, the State Taxation Administration, and the Ministry of Commerce jointly issued the Announcement No. 2 of 2025 ("Announcement 2"), establishing the tax credit framework.
- In July 2025, the State Taxation Administration subsequently released the Announcement No. 18 of 2025 (hereinafter "Announcement 18") to clarify operational details.
The above new policies build upon the existing preferential policy, 2018 Circular No. 102 ("Circular 102"), which allowed foreign investors to defer withholding income tax on dividends sourced from China for their reinvestment in China. On the basis of Circular 102, Announcement 2 adds a tax credit benefit - meaning the foreign investors can not only defer the withholding tax on dividends but also offset the future tax liabilities with a tax credit linked to their Qualifying Reinvestment. This reinforces China's commitment to strengthening its foreign investment ecosystem.
II. Tax Credit Policy Mechanics
Since the purpose of the new tax credit policy is to promote the long-term Qualifying Reinvestment, the tax credit requires a minimum five-year holding period for reinvested assets. Early disposition triggers immediate tax repayment.
We lay out the calculation method, the way of using the tax credit, and offer practical examples to facilitate the understanding of the new policy.
1. Tax Credit Calculation
The tax credit is determined by two factors:
- Tax Credit = Reinvestment Amount × Applicable Rate
- Reinvestment Amount: After-tax dividends from the Chinese resident enterprises (the "Profit-Distributing Enterprise")
- Applicable Rate: 10% standard rate or preferential tax treaty rate (e.g., 5% under China-Singapore DTA)
2. Tax Credit Utilization
The tax credit can be applied to the foreign investors regarding their future tax liabilities arising from three types of incomes received from the Profit-Distributing Enterprise: 1) dividends; 2) interests; and 3) royalties. With respect to other types of incomes, such as capital gains, profits attributable to the permanent establishment, are not eligible in principle to apply the tax credit.
The key constraints shall be noted. The tax credit only applies to income generated after the reinvestment is completed. Further, the income shall have a direct economic linkage with the Profit-Distributing Enterprise, excluding the income sourcing from other domestic enterprises.
3. Illustrative Cases
We illustrate the following examples to facilitate the understanding of the new tax credit policy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
