On September 29th 2018, China’s Ministry of Finance, State Administration of Taxation and National Development and Reform Commission and Ministry of Commerce jointly issued Cai Shui  No. 102 (Circular 102) to widen the scope of withholding tax deferral treatment on direct foreign investment encouraged projects to all non-prohibited foreign investments.
Circular 102 replaces Circular 88 and becomes retroactively effective on 1 January 2018.
Prior to the issuance of Circular 102, Circular 88 indicates that the withholding tax deferral policy only applied to foreign investors who directly reinvested their attributable profits from their Chinese tax resident investees into one of the designated encouraged industries.
Under Circular 102, the scope of the withholding tax deferral treatment on direct reinvestment is expanded to all foreign investments that are not prohibited for foreign investors.
An overseas investor qualifies to temporary waive the withholding income tax of the direct investment shall satisfy all the following criteria:
- The reinvestment profits shall include equity investment activities.
- The attributable profits of an overseas investor should arising from retained earnings.
- Cash investment-relevant monies shall be transferred directly and shall not be circulated among other domestic or overseas accounts prior to making direct investments; Non-cash investment-relevant asset ownership shall be transferred directly and shall not be held on behalf, or temporarily held, by other enterprises or individuals prior to making direct investments.
In addition, if overseas investor is entitled to temporary waiver for withholding of income tax pursuant to the provisions but does not claim the entitlement, it may apply to claim the said entitlement within three years from the date of actual payment of the relevant taxes, and request for the refund of the paid tax.
It can be predicted that this policy will greatly promote overseas investors make profit reinvestment in China.