Tax credit policy to encourage foreign investment

China has unveiled detailed guidance on a new tax credit policy aimed at encouraging foreign investors to reinvest their profits in the country, as it steps up efforts to stabilize foreign capital inflows and boost long-term investment amid rising global economic uncertainties.

The State Taxation Administration released a new notice clarifying how foreign investors can apply for and use tax credits when they reinvest their distributable profits into Chinese companies. The policy allows eligible investors to offset Chinese tax liabilities if they commit to keeping the investment in China for at least five years.

Under the new rules, foreign companies that use profits distributed by their Chinese subsidiaries to make direct equity investments — such as capital increases or establishing new ventures — can apply for a tax credit equal to 10 percent of the reinvested amount. Alternatively, they may opt for a lower rate based on applicable bilateral tax treaties.

For example, a foreign company that reinvests 10 million yuan ($1.39 million) in distributed profits can select a 10 percent credit worth 1 million yuan. If it later sells the investment after five years, it must repay the deferred withholding tax, but the credit can offset that amount.

Li Xuhong, a professor at the Beijing National Accounting Institute, said: "The policy reduces the tax burden on foreign enterprises and supports the stable development of China's economy. At the same time, it sends a strong signal that China welcomes long-term investment."

The guidance lays out various scenarios — from simple equity infusions to reinvestments via profit-derived cash or noncash assets like securities or equipment. It also details the process of calculating credit entitlements and managing them over time.

Although the incentive is currently slated to run from Jan 1, 2025 through Dec 31,2028, companies can continue to use any unused tax credit balances after the deadline.

Bai Yanfeng, a professor from the Central University of Finance and Economics, said, "Such a provision better takes into account the actual needs of foreign investors and supports them in continuing to share in the growth dividends of Chinese companies."