Companies reinvesting profits can get tax break

An employee counts yuan banknotes at a bank in Beijing, April 13, 2016.[Photo/Agencies]

China continues to welcome foreign investment through a temporary exemption of the withholding tax on profits that are reinvested in the country, the Finance Ministry said in a statement released on its website on Thursday.

The move will help retain foreign investment and stabilize cross-border capital flows, analysts said.

The measure aims to encourage sustainable and long-term foreign investment in China and improve the quality of the business environment for foreign companies, the statement said.

The Ministry of Finance said more measures to encourage foreign enterprises to reinvest their profits in China and avoid drastic capital outflow fluctuations will be released in the coming months.

China levies its withholding tax at a rate of 10 percent on foreign firms' earnings. However, that withholding tax can be exempted if that profit is put into qualified direct equity investments, including stocks.

The statement said that foreign investors who get the tax exemption must meet certain conditions. Their direct investment should support industries that the country encourages and the investment must be transferred directly into the companies receiving the investment.

The tax exemption will be retroactive from the beginning of this year, meaning foreign investors who have paid the tax can get a refund.

Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, told China Daily that the new measure will help to stabilize foreign investment and reduce potential fluctuations of cross-border capital flows due to uncertainties in global economic growth.

The country is expected to continue to advance tax reform next year, including a further reduction of value-added tax and cuts in government administrative fees, with a view to lowering enterprises' operational costs while improving their profits, according to Liu.

Ma Jun, deputy director of the National Academy of Economic Strategy under the Chinese Academy of Social Sciences, said it will partially ease impacts on China from the recent US tax overhaul that has just been signed into law by US President Donald Trump, which reduces corporate tax to attract global investment into the US market.

"Enterprises that have large cross-border capital flows will be more affected, and the policy is likely to be readjusted according to changes in the global tax environment," he said.

Liu Yi, a professor at the School of Economics at Peking University, said, "It is not hoped that there will be a wave of tax reduction competition around the world motivated by the US tax cut program, as that will reduce the fiscal capacity of other countries to improve their living standards."