Overall, 2017 saw significant changes in Chinese tax rules
and in the broader regulatory environment. Many of the changes
reflected the reorientation of government policy towards an
evolving cross-border investment landscape. The digitisation of
the economy, as well as the tax administration, was also a key
driver of developments.
The government launched a range of initiatives aimed at
reinvigorating foreign investment into China, which had
levelled off in recent years. The State Council's January 2017
Circular No. 5 and August 2017 Circular No. 39 played a key
role in this regard:
- The circulars set out plans to loosen the
requirements for foreign investors to have Chinese
co-investors, where entering previously restricted areas of
the auto, financial services, transport and telecoms sectors.
The detailed rules for the financial services sector quickly
emerged in the autumn, with the remaining details due in the
first half of 2018.
- This followed on from steps the government
had already taken earlier in 2017 to ease red tape for
foreign investors. A national 'negative list' approach was
rolled out under which most foreign greenfield and M&A
investment just needs to be registered with the authorities.
Previous pre-approval requirements were scrapped, and
retained solely for a limited number of restricted sectors.
These were, in any case, reduced in the June 2017 revised
catalogue of industries for guiding foreign investment.
- The July 2017 launch of the bond connect
scheme gave foreign investors access to China's $10 trillion
interbank bond market via Hong Kong. This complements the
existing Stock Connect schemes, which received continued
government support with the renewal of their special tax
treatment in November 2017.
- Circular 39 also set out a new tax
incentive to support inbound investment. This defers
withholding tax (WHT) on dividends where they are reinvested
in China by their foreign recipients – details are
due by end of 2017. In parallel, the October SAT Announcement
No. 37 clarified WHT administration, lessening exposures for
foreign sellers of Chinese assets.
These measures were accompanied, throughout the year, by
enhanced R&D tax treatment for SMEs, VC and angel investor
tax incentives for tech sector investment, and reduced VAT and
local fee burdens. At the same time, tax enforcement was
enhanced with new transfer pricing rules in March 2017, and
guidance on international exchange of tax information in May
2017. This was accompanied by China's July 2017 adherence to a
global multilateral instrument, which is set to update 48 (and
rising) China tax treaties for new anti-abuse rules. The first
half of 2018 is set to accompany this with new permanent
establishment and treaty abuse guidance, and potentially
guidance on controlled foreign company and anti-hybrid
On the outbound investment front, the government took
measures to both rein in speculative ventures, and
channel/assist favoured investments. A series of measures taken
by the foreign exchange and banking regulators, as well as the
Ministry of Commerce, the state-owned enterprise oversight
body, and the National Planning Agency (NDRC), in late 2016 and
early 2017, saw levels of outbound investment make a sharp
downward correction. By November 2017 it was estimated that
outbound investment for the year would be down 40% on 2016.
August 2017 government guidance clarified the new approach,
disallowing investments in foreign sports clubs and
entertainment assets, but designating Belt and Road Initiative
(BRI) infrastructure investments as formally 'encouraged'. BRI
investment rose over the year. Circular No. 39 indicated that
Chinese tax rules for outbound investment would be revamped, to
either enhance foreign tax credits or exempt dividends from
overseas from tax – details are expected in in the
first half of 2018.
As ever, Chinese tax and regulatory policy is a mixture of
'give and take', and new regulations will continue to be issued
at a fast clip as we enter 2018.
Khoonming Ho (firstname.lastname@example.org)
and Lewis Lu (email@example.com)
Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421