China revives tax incentive for dividends reinvested into China

January 5, 2018

BEIJING – China’s Ministry of Finance, State Administration of Taxation (SAT), National Development and Reform Commission and Ministry of Commerce have jointly released Notice 88 which allows a non-resident enterprise to defer payment of tax on dividends derived from a Chinese enterprise if, among other things, the non-resident enterprise directly reinvests the dividends into industries “encouraged” by the Chinese Government.

Lawyers Baker McKenzie say the concept of the dividend tax deferral regime was first introduced by the State Council in a circular dated August 8, 2017 as a measure to attract foreign investment.

“After four months of silence, the four Ministries released the dividend tax deferral implementing rules on the last working day of 2017,” BM says in a Client Note.

“The timing does not appear to be coincidental, given the recent conclusion of the legislative process on US tax reform.

“While the US tax reform may have removed a principal disincentive of US multinational companies (MNCs) to repatriate earnings from their Chinese subsidiaries back to the US, Notice 88 appears to encourage MNCs to keep those earnings in China. (ATI).