In 2025, China introduced a new tax credit policy aimed at further encouraging foreign-invested enterprises to reinvest their profits in domestic projects. This policy was jointly issued by the Ministry of Finance, the State Taxation Administration, and the Ministry of Commerce, with the announcement number being Announcement No.2 of 2025. It came into effect on January 1,2025 and will be valid until December 31,2028. Rather than replacing the deferred tax policy of 2018, the new policy builds upon the existing framework, offering a more favorable tax environment for foreign investment in China.

Core Content of the Policy

According to Announcement No.2 of 2025, foreign investors who reinvest their profits, which are distributed from resident enterprises in China, into qualified domestic projects during the period from 2025 to 2028, can obtain a 10%tax credit on the reinvested amount. This tax credit can be used to offset the corporate income tax payable by the foreign investor in the current year. If the credit is not fully utilized in the current year, it can be carried forward to future years until the credit is exhausted.

To enjoy this tax credit policy, foreign investors must meet the following conditions simultaneously:

• The reinvestment must be made in projects that comply with Chinese laws, regulations, and industrial policies.

• The investor must hold the reinvested assets for at least five years; Otherwise, the tax credit will be reduced proportionally.

• The tax credit is applicable only to the taxes payable on income sourced from China, such as dividends, interest, and royalties, obtained after the completion of the reinvestment.

• If there is a tax treaty between China and the investor's home country, and the treaty stipulates a lower dividend tax rate than 10%,the tax credit limit will be calculated based on the treaty rate. For example, if the treaty rate is 5%, the actual tax credit available to the investor will be capped at 5%.

Policy Changes and Advantages

Compared to the deferred tax policy of 2018, the 2025 tax credit policy has made the following optimizations and expansions:

• Tax Incentive Mechanism: The 2018 policy deferred the payment of 10% dividend withholding tax, while the 2025 policy provides a permanent tax credit, achieving an absolute reduction in tax liability.

• Scope of Application: The 2018 policy had already expanded its scope to all non-prohibited foreign investment projects and fields. The 2025 policy further clarifies the specific conditions and operational procedures for tax credits on this basis.

• Policy Sustainability: The 2025 policy allows unused tax credits to be carried forward indefinitely, supporting long-term strategic investments.

Practical Considerations

Despite the significant tax benefits offered by the new policy, there are several practical issues that need attention:

• Early Withdrawal of Investment: If an investor withdraws the reinvested assets five years before, the tax credit will be reduced proportionally. The specific calculation method for this reduction still requires further guidance.

• Partial Reinvestment: If a foreign investor reinvests only a portion of the distributed profits and remits the rest, how to proportionally enjoy the tax credit and how to tax the non-reinvested part are issues that require further guidance.

Conclusion

The 2025 tax credit policy builds on the 2018 policy, offering a more favorable tax environment for foreign investment and encouraging long-term investment in China. For enterprises that meet the conditions and have plans for reinvestment, it is advisable to assess their own situation in combination with profit distribution and investment planning. By doing so, they can maximize the efficiency of capital utilization within the legal and regulatory framework. This not only means a reduction in current tax liabilities but also demonstrates the attractiveness and confidence of China's long-term development.

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.  

PHC Advisory is a company of  DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

Would you like to learn more about the business environment in China? Click the link and download our Practical Guides on Amazon! 

The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

• China's New Tax Rules for Internet Platforms-NEWS-PHC ADVISORY

• Tax Compliance for Uninvoiced Revenue: A Guide for Businesses-NEWS-PHC ADVISORY