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China: Inbound and outbound investment incentives kick off

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In the final days of 2017, the Chinese authorities set out a series of new incentives and improved tax treatments with a view to fostering both greater inbound and outbound investment in 2018. The Chinese Finance Minister, Mr Xiao Jie, also set out his plan of broader reforms for the medium term.

In terms of inbound incentives:

  • On December 28 2017, the State Administration of Taxation (SAT), the Ministry of Finance (MOF), and several other government departments, issued Circular 88. This sets out the details of a new incentive under which the withholding tax (WHT) imposed on dividends paid out of China (usually 10% before treaty relief) will be deferred where the dividends are reinvested in China by their foreign recipient. This incentive had first been signposted in the State Council Circular 39 in August 2017. The investments made must conform to certain requirements (including being made in 'encouraged industries'), and the incentive is applicable to investments made out of distributions made on and after January 1 2018.

In terms of outbound incentives:

  • On December 28 2017, the SAT and MOF issued Circular 84. This enhances the foreign tax credit (FTC) granted to Chinese tax resident enterprises in respect of foreign tax incurred on income which is also taxable in China. Specifically, where dividends are received from overseas enterprises, China previously (i) required that FTCs be calculated on a country-by-country basis (i.e. 'country baskets') and (ii) only permitted FTC to be granted for the 'underlying' corporate tax, incurred by overseas subsidiaries of the Chinese enterprise, down to three tiers of 'sub-subsidiaries'. Under Circular 84, (i) an election can be made so that the 'country baskets' do not apply, meaning that 'onshore pooling' of FTCs is possible, and (ii) FTCs for underlying tax are allowed down to five tiers of sub-subsidiaries.

  • On November 29 2017, the SAT issued Announcement 41. This clarifies the administrative rules governing FTC for overseas construction projects. Specifically, the clarifications facilitate Chinese constructing subcontractors and consortium members, conducting overseas construction work for general contractors/consortium leaders, to obtain FTC in China for foreign tax.

In terms of China tax reform plans for the medium term, the finance minister made the following clarifications in a People's Daily article published on December 20 2017.

  • Establishment of a new individual income tax (IIT) system. This would adopt a 'comprehensive taxation' approach (i.e. consolidated tax calculation and filing) for certain categories of income, such as salaries and wages, and independent service income, with the filing being made on an annual basis. These income types are taxed under separate tax calculations and filed monthly. At the same time, other income types such as dividends and interest, would continue to be taxed separately, at income type-specific IIT rates, as at present. These changes would be accompanied by enhanced IIT deductions, modifications to the IIT tax base, and improved collection mechanisms supported by a comprehensive national information system for personal income and property holdings.

  • The corporate income tax (CIT) system would continue to be enhanced, particularly for companies investing in the Belt and Road (BRI) countries, with a view to improving the competitiveness of the China tax system.

  • A real estate tax (RET) will be introduced, imposing an annual charge (based on assessed real estate value) on residential and business property holdings, while at the same time lessening tax burdens imposed on real estate construction and transfer.

  • Local taxation will continue to be reformed, and the division of tax revenues between central and local levels of government will be revised. VAT and consumption tax policies will be improved (with enhanced VAT export refunds on the cards). There will also be a push to put all tax laws on a statutory footing (i.e. passed as laws by the National People's Congress) by 2020. This will be accompanied by further conversion of various fees, charges, and other administrative impositions, into taxes on a statutory basis.





Lewis Lu

Khoonming Ho ( and Lewis Lu (

KPMG China

Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421


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