China Unveils Tax Breaks to Encourage Foreign Companies to Reinvest

By Cheng Siwei and Denise Jia

China has rolled out new tax incentives to encourage foreign companies to reinvest profits earned in the country, in its latest move to strengthen foreign direct investment amid economic headwinds.

According to a joint announcement by the Ministry of Finance, the State Taxation Administration, and the Ministry of Commerce, foreign investors who reinvest dividends and other profits earned from Chinese subsidiaries into qualified domestic investments between Jan. 1, 2025, and Dec. 31, 2028, may offset up to 10% of the reinvested amount against their annual tax liability.

If the tax credits exceeds the investor’s current-year liability can, the surplus can be carried forward to future years. The policy aims to encourage foreign businesses to expand their presence in China instead of repatriating profits, tax experts told Caixin.

The announcement outlines specific criteria: eligible reinvestments must remain in China for at least five years, and the invested companies must operate in sectors listed in the Catalogue of Industries for Encouraging Foreign Investment, published by the National Development and Reform Commission and the Ministry of Commerce.

Qualifying profits include dividends or other equity gains derived from retained earnings actually distributed by Chinese resident enterprises — defined as companies legally incorporated in China or established overseas but with effective management based in China.

Approved reinvestment methods include increasing or converting registered capital or capital reserves in resident enterprises, setting up new resident enterprises, or acquiring equity in Chinese companies from non-affiliated parties. Investments in listed companies are excluded, except for certain approved strategic investments.

This policy offers a new tax deferral benefit to foreign investors, a tax lawyer told Caixin. Under normal rules, dividends paid by Chinese subsidiaries to foreign investors are subject to a 10% withholding tax, unless a tax treaty grants a lower rate. Under the new policy, reinvested profits in qualifying projects can yield a tax offset equal to 10% of the reinvested amount.

However, the five-year holding requirement is strictly enforced. Early withdrawal of reinvested funds triggers retroactive cancellation of, requiring repayment of deferred taxes and a proportional reduction of any remaining credit balance, the notice said.

Reporting requirements are also detailed. Foreign investors must submit relevant documentation through China’s unified Foreign Investment Comprehensive Management System managed by the Ministry of Commerce. Local and provincial commerce, finance and tax authorities will review and confirm eligibility.

To ensure transparency and effective oversight, reinvested funds must be transferred directly from the distributing company’s account to the invested enterprise or equity seller, without passing through intermediary accounts. For non-cash investments, such as equipment or securities, ownership must be transferred directly to the invested company before the reinvestment is considered complete.

Contact reporter Denise Jia (huijuanjia@caixin.com)

caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.

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