On 28 July 2017, an executive meeting of the State Council outlined a series of measures to further boost foreign direct investment in China. One of the new State Council measures temporarily permits the deferral of dividend withholding tax (WHT), otherwise levied on the distributed profits of a foreign invested enterprise (FIE), where the relevant amounts are reinvested in ‘encouraged’ projects. In this Alert we consider relevant aspects of the new relief for foreign investors.
From 2008 onwards, with the introduction of the new Corporate Income Tax (CIT) Law, FIEs have been obliged to withhold 10% WHT on distributions to foreign investors, unless double taxation agreement (DTA) relief applies. Consequently, the recycling of China profits by foreign investors, into further China investments, involves tax leakage where conducted from overseas. To deal with this, some foreign enterprises have used onshore holding companies to recycle and reinvest China profits without tax leakage, as intra-corporate dividends in China are tax exempt.
Two structuring options have been available in this regard. A special China Holding Company (CHC) regime allows for an onshore holding company to be established, which can use cash equity and debt to make China equity investments. Alternatively, 2012 Ministry of Commerce (MOFCOM) guidance facilitates a foreign enterprise to contribute the equity of existing operating FIEs into a separate holding FIE, to create an onshore holding company. The CHC regime rules demand that the relevant foreign investor has global assets of at least USD400 million and its onshore holding company registered capital of more than USD30 million, limiting its usefulness. The second option, while more accessible for smaller enterprises, also involves certain regulatory challenges.
As such, the new State Council measure may be very useful and facilitate the use of offshore platforms, such as corporate regional hubs in Hong Kong and Singapore, for China profit consolidation and reinvestment.
It is noted that, at present, a number of uncertainties exist:
Details are anticipated by September 2017, and KPMG China will follow up with further updates on the clarified relief.
Other 28 July State Council meeting measures include:
This is the second in a series of articles, titled “China to boost direct foreign investment”, covering the announced policy changes from the 28 July State Council meeting. Further articles are to follow.
See the first article “Limits on foreign equity stake in Chinese enterprises to be lifted” in this series.