FAQs: Deferred taxation for reinvestment


To help overseas companies with deferred taxation for reinvestment, the following are answers to frequently asked questions.

Q1: What types of reinvestment are eligible for deferred taxation?

A1: Direct investment by overseas investors using their distributed profits is eligible for deferred taxation. This includes equity investments such as capital increases, establishment of new enterprises, and acquisitions of equity. However, it excludes increases in the number of shares of listed companies through issuing shares or bonuses, or acquiring shares, except for qualified strategic investments.

Specifically, this includes:

1.       Increasing the paid-in capital or capital reserves of resident enterprises in China through the issuance of new shares or bonuses;

2.       Investing in the establishment of new resident enterprises in China;

3.       Acquiring equity in resident enterprises in China from non-related parties;

4.       Other methods as stipulated by the Ministry of Finance and the State Taxation Administration.

The profits distributed to overseas investors refer to dividends, bonuses, and other income from equity investments, resulting from the actual distribution of retained earnings by resident enterprises in China to overseas investors.

Cash profits used by overseas investors for direct investment must be transferred directly from the account of the enterprise receiving the distributed profits to the account of the invested enterprise or the equity transferor. The cash should not be allowed to appear in other accounts at home or abroad before the completion of direct investment.

As for non-cash profits, such as goods and securities, used by overseas investors for direct investment, it requires the ownership of the related assets to be transferred directly from the company receiving the profit to the invested enterprise or the equity transferor, without being held by other enterprises or individuals on behalf or temporarily before direct investment is accomplished.

Q2: How can eligible overseas investors benefit from deferred taxation?

A2: Eligible overseas investors can enjoy deferred taxation by completing and submitting the requisite forms of tax withholding. Within 7 days from the date of actual profit payment, the profit-distributing enterprise is responsible for submitting the Enterprise Income Tax Withholding Report of the People's Republic of China, along with the Information Reporting Form for Non-Resident Enterprises to Defer Prepaid Income Tax filled out by overseas investors. The latter form is then reviewed and supplemented by the profit-distributing enterprise before being forwarded to the competent tax authority.

Eligible overseas investors can also retroactively enjoy deferred taxation. Those entitled investors who have not yet utilized the deferred taxation can apply for retroactive benefits and request a tax refund within three years from the date of actual payment. To do so, overseas investors must submit the Information Reporting Form for Non-Resident Enterprises to Defer Prepaid Income Tax to the competent tax authority of the profit-distributing enterprise, along with any other required documents such as relevant contracts and payment vouchers.

Q3: How should overseas investors manage taxation when they withdraw their investment after benefiting from deferred taxation due to profit reinvestment?

A3: When overseas investors who have enjoyed deferred tax benefits from profit reinvestment withdraw their direct investment, be it through equity transfer, repurchase, liquidation, or any other method, they are required to declare and settle the deferred tax with the tax authority within 7 days of receiving the corresponding amount. In cases where the invested enterprise undergoes restructuring that meets the conditions for special restructuring and is treated accordingly for tax purposes, overseas investors may continue to enjoy the preferential treatment of deferred tax for reinvestment.

Q4: How can overseas investors enjoy tax treaty benefits when settling deferred taxes?

A4: Overseas investors who have benefited from tax deferral for reinvestment can enjoy tax treaty benefits when paying deferred taxes as per relevant regulations. However, these benefits are applicable only to tax treaties in force at the time of profit payment.

In cases where subsequent tax treaties contain provisions, they must be adhered to by the terms outlined in those treaties.