Authored by Lei Xu

On 27 June 2025, the Ministry of Finance, the State Taxation Administration, and the Ministry of Commerce jointly released the Announcement on the Tax Credit Policy for Foreign Investors’ Direct Investment Using Distributed Profits (Announcement [2025] No. 2). The new policy provides a clear framework to encourage foreign investors to reinvest profits earned in China back into the Chinese market.

Key Features of the Policy

• Tax Credit Incentive

  Foreign investors that reinvest dividends distributed by a Chinese resident enterprise into eligible domestic direct investments between 1 January 2025 and 31 December 2028 may claim a tax credit equal to 10% of the reinvestedamount against their annual tax liability. Unused credits can be carried forward. If a tax treaty provides a withholding tax rate on dividends lower than 10%, the treaty rate will prevail.

• Eligible Direct Investments

  Direct investments in China made by foreign investors using distributed profits include equity contributions such as capital increases, greenfield projects, and equity acquisitions. Investments in newly issued or converted shares of listed companies are excluded, except for qualified strategic investments. The investee enterprise must operate in an industry listed in the Catalogue of Encouraged Industries for Foreign Investment, and the foreign investor must hold the investment continuously for at least five years (60 months).

• Scope of Tax Liability

  The tax credit applies to the corporate income tax otherwise payable on income derived from the reinvested profits, including dividends, interest, and royalties as defined under Article 3(3) of the Enterprise Income Tax Law.

• Filing and Administration

  Eligible foreign investors must provide supporting documentation to the distributing enterprise, which may then withhold no tax on the reinvested profits. The distributing enterprise reports the adjustment to the competent tax authority at the time of payment. Upon disposition of the investment that has benefited from the tax credit, the foreign investor must, depending on the holding period, file with the tax authority to pay the deferred tax or adjust the amount of the credit.

• Information Reporting and Confirmation

  Foreign investors must submit information to the local commerce authority through the investee enterprise. Upon joint confirmation by provincial-level commerce, finance, and tax authorities, the local commerce authority will issue the relevant documents to the investee enterprise. Commerce authorities at all levels, together with the relevant departments, will monitor the reinvested profits, and noncompliant cases will be referred to tax authorities for recovery of underpaid tax.

• Transitional Arrangements

  The policy applies retroactively to eligible reinvestments made between 1 January 2025 and the announcement date, with tax credits available to offset liabilities incurred after the announcement’s release. Investments made prior to 1 January 2025 are not eligible.

Implications

This announcement provides foreign investors with tax certainty and tangible incentives for reinvesting profits in China. The policy is designed to stimulate sustained foreign investment, support the growth of encouraged industries, and contribute to China’s long-term economic development.