China: New tax credit for foreign investors (2025–2028)

published on 18 July 2025 | reading time approx. 3 minutes

Recently, the Chinese Ministry of Finance and the State Tax Administration jointly issued an Announcement, granting a withholding tax credit to foreign investors who make direct investments using distributed profits, subject to certain conditions.

The tax incentives are effective from 1 January 2025 to 31 December 2028.

Background: From Tax Deferral to Real Tax Benefits

To encourage foreign investment, China has allowed withholding tax deferral on reinvested profits since 1 January 2017. With the new Announcement, foreign investors can now benefit from an actual tax credit, rather than a mere deferral.

Tax Credit Method

From 1 January 2025 to 31 December 2028, 10 percent of reinvestments from distributed profits can be claimed as a tax credit. This can be used to reduce withholding tax on dividends, interest, royalties and service fees paid to foreign investors after the reinvestment date. Unused credits can be carried forward indefinitely. If the withholding tax rate for dividends is less than 10 percent under a double taxation agreement (e.g., 5 percent under the Sino-German DTA), the lower tax rate applies.

Preconditions for the Tax Credit

According to the announcement, all of the following conditions must be met:

The profits must be realized profit carry forwards that have been declared for reinvestment.
The investments must be made as direct investments, including capital contributions such as capital increases, new establishments, or share acquisitions. *Exceptions are: capital increases of listed companies, conversions into share capital, or share acquisitions of affiliated companies.
The business scope of the invested company must be listed in the “Catalogue of Industries Promoted for Foreign Investment."
The reinvestment must be held for at least 5 years (60 months).
The capital must be transferred directly to the account of the invested company or the seller of the shares – no other accounts may be used as intermediaries.

Follow-Up Administration Through Self-Assessment

he tax incentives are claimed by the investor via self-assessment. The tax office can check later whether all the preconditions has been met. So, it's important to get all the right paperwork together ahead of time.

Tax Treatment in Case of Withdrawal After 5 Years

If the reinvestment is withdrawn after five years, the withholding tax on the corresponding dividends distribution must be paid within seven days. Any remaining tax credits can be used to reduce the tax burden.

Withdrawal Within 5 Years: Reduction of the Tax Credit

If the reinvestment is withdrawn before the end of the five-year period, the following tax consequences apply:

– The withholding tax must also be paid within seven days.

– The tax credit is reduced proportionally.

– If more credit has been used than is permitted, the excess amount must be repaid.

In the case of mixed reinvestments, the following applies: Investments for which a credit has already been used are considered to be withdrawn first.

Retroactive Application from 1 January 2025

The regulation applies retroactively from 1 January 2025. Anyone who has reinvested since then can apply for the credit retroactively. The credit will be applied to withholding tax reported after 27 June 2025.

Our observation: Making Strategic Use of Tax Benefits

Compared to the withholding tax deferral that has been in effect since 1 January 2017, the new tax incentives offer a decisive advantage: Withholding tax on profit distributions used for reinvestment in China is not only deferred—it can be waived entirely if the reinvestment is held for at least five years. This is made possible by the tax credit mechanism. For foreign investors who have reinvested distributed profits after 1 January 2025, but have not yet claimed the tax credit, it is particularly important to note that retroactive applications are still possible. In addition, the new regulations open up strategic opportunities for companies looking to expand their involvement in China. The tax incentives can be used in a well-planned manner to structure investments efficiently.