On June 30, 2025, China's Ministry of Finance, State Taxation Administration, and Ministry of Commerce jointly promulgated a significant tax incentive policy designed to encourage foreign investors to channel dividends received from Chinese resident enterprises back into domestic investment projects. Effective from January 1, 2025, through December 31, 2028, this measure grants a corporate income tax credit equivalent to 10% of qualifying reinvested amounts. Unused credits can be carried forward to subsequent tax years, while applicable preferential tax treaty rates remain respected. The initiative underscores China's strategic focus on attracting stable, long-term foreign capital into priority sectors and elevating the quality of foreign direct investment.

Scope and Eligibility of the Tax Credit

Under this policy, foreign investors receiving dividends or profit distributions—characterized as equity investment income—from Chinese resident companies may utilize these earnings to fund domestic direct investments. Eligible reinvestments encompass:

Capital injections or increases of paid-in capital or capital reserves in existing resident enterprises;

The establishment of new resident enterprises within China;

Acquisition of shares from unrelated third parties in Chinese resident enterprises.

Purchases of additional shares in publicly listed companies are generally excluded unless classified as qualifying strategic investments.

The invested enterprises must operate within industries catalogued in China's Catalogue of Encouraged Industries for Foreign Investment, thereby aligning reinvestments with sectors prioritized by national development policy.

Key Conditions and Compliance Mechanisms

Investors are required to maintain their reinvestments for a minimum of five consecutive years to retain eligibility for the tax credit. Reinvested profits must be transferred directly in cash, or, for non-cash assets such as securities, ownership must pass directly from the dividend-distributing entity to the invested enterprise without intermediary custody. These stipulations aim to safeguard the policy's integrity by preventing indirect or temporary asset holding.

The 10% tax credit can be offset against the investor's corporate income tax liabilities arising from subsequent equity income—dividends, interest, royalties—related to the reinvestment. Where credits exceed annual tax obligations, remaining balances may be carried forward.

Should the investor divest before the five-year holding period lapses, deferred taxes become payable within seven days of the divestment, and the tax credit entitlement will be proportionately reduced. Any credits utilized beyond the adjusted allowance must be reimbursed promptly.

The policy further establishes a rigorous reporting and verification framework through the Ministry of Commerce's unified foreign investment management platform. Investors and enterprises must submit detailed disclosures regarding investor identity, investment amounts, industry sectors, timelines, and related documentation. Provincial commerce authorities coordinate cross-agency confirmation to ensure compliance and maintain oversight.

Relevance to Foreign Investors and Global Business

This tax credit represents a carefully calibrated policy instrument aimed at deepening foreign investors'participation in China's domestic economy through reinvestment, rather than simple profit repatriation. For professionals engaged in banking, investment management, export credit insurance, multinational corporate governance, and international legal and accounting services, the measure offers a transparent fiscal incentive to expand their domestic footprint within sectors endorsed by the Chinese government.

By incentivizing reinvestment into strategically significant industries, the policy mitigates reinvestment risk, enhances post-tax capital efficiency, and aligns foreign capital flows with China's evolving economic priorities.

Moreover, adherence to existing tax treaties preserves preferential withholding rates on dividends and related investment income, easing cross-border tax planning and diminishing the prospect of double taxation for foreign enterprises.

Authoritative Data and Official Position

The policy, formalized in Announcement No. 2 (2025) by China's key fiscal and commerce authorities, operationalizes directives from the central government to refine foreign investment frameworks and promote high-quality growth.

International tax experts regard this initiative as an important advancement, enabling foreign investors to more effectively recycle earnings into the domestic economy with clear and predictable fiscal benefits.

A Paradigm of Fiscal Incentivization for Enhanced Capital Integration

China's introduction of a 10% tax credit on reinvested dividends articulates a refined fiscal approach to fostering durable foreign investment. For international investors and advisors, mastery of the detailed eligibility criteria and compliance protocols will be indispensable to capitalizing on this opportunity.

This policy marks a further step in China's efforts to cultivate a transparent, investor-friendly tax environment that supports sustained cross-border economic integration and long-term value creation.