Mainland China announces tax credit policy for foreign investors making direct reinvestments

• On 27 June 2025, China's Ministry of Finance, State Taxation Administration and Ministry of Commerce announced a 10% tax credit for qualified foreign investors who directly reinvest profits from their Chinese subsidiaries in Mainland China, effective retroactively from 1 January 2025 through 31 December 2028.
• Foreign investors can offset their Chinese tax payables against the reinvestment amount, with any unused credits eligible to be carried forward beyond 2028 until fully utilized, enhancing cash flow for reinvestments.
• To qualify for the tax credit, reinvestments must meet specific conditions, including being made with attributable profits, being in encouraged industries and being held for a minimum of five years.
• Foreign investors that are interested in this incentive should assess their eligibility for this tax credit, considering their foreign tax credit positions and the implications of global tax reforms, such as Pillar Two.

On 27 June 2025, China's Ministry of Finance (MOF), State Taxation Administration (STA) and Ministry of Commerce (MOFCOM) jointly issued an announcement (Notice 2), offering qualified foreign investors the opportunity to enjoy a 10% tax credit if they directly reinvest in Mainland China with attributable/distributable profits from their Chinese subsidiaries (China profits). This measure, which takes retrospective effect from 1 January 2025 through 31 December 2028, also allows any unused credits to be carried forward to periods after 31 December 2028 until the balance has been fully utilized.

Pursuant to Notice 2, foreign investors who "reinvest" in Mainland China with China profits between 1 January 2025 and 31 December 2028 and meet the relevant conditions (Qualified Reinvestments) may offset their Chinese tax payables1 in the same tax year against the reinvestment amount (maximum 10%), with any balance eligible to be carried forward. If a Sino-Foreign Double Tax Agreements (DTA) offers a rate that is lower than 10% — e.g., 5% on dividends under the prevailing Mainland China-Hong Kong DTA — the treaty rate shall apply, provided relevant conditions are met.

Requirements/conditions

Qualified Reinvestments by foreign investors that are eligible for the 10% credit incentive must simultaneously satisfy the following conditions:

1. "China profits" must consist of dividends and other types of investment income that are distributed or distributable by the Chinese subsidiaries to foreign investors.
2. The direct reinvestment carried out with China profits may take the form of capital increase, new establishment and acquisition of Chinese equity from third parties; however, investments in listed companies are excluded unless qualified as "strategic investments" within MOFCOM measures.
3. The enterprise in which foreign investors are reinvesting China profits must operate in an industry that falls under the "encouraged" category pursuant to the "Encouraged Foreign Investment Industry Catalogue."
4. Foreign investors must continuously hold the "reinvestment" for a minimum of five years (60 months).
5. The China profits being reinvested in cash form must be paid or transferred directly to the domestic enterprise being reinvested in, and/or to the third party disposing of its equity interest in the Chinese subsidiary and must not circulate in any other accounts; in other words, the China profits must be "recirculated" within Mainland China.

Key takeaways

Notice 2 reflects China's efforts to encourage foreign direct investments by enhancing its business environment through fiscal incentives, providing foreign investors with a more tax-efficient redeployment option for China profits.

Foreign investors looking to enjoy the preferential treatment offered under Notice 2 will also need to consider their own foreign tax credit positions when determining whether the tax credit policy offered under Notice 2 would be beneficial and, likewise, the potential effect that Pillar Two and minimum tax elements may have.

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Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor