China Grants 10% Tax Credit for Overseas Investors Reinvesting Profits

China introduced a new tax credit policy allowing overseas investors to claim a 10 percent credit on reinvested profits in qualified domestic sectors. This move, part of a broader strategy to stabilize and upgrade foreign investment, reflects Beijing’s commitment to attracting long-term capital into high-tech and strategic industries.

On June 27, 2025, China’s Ministry of Finance (MOF), State Taxation Administration (STA), and Ministry of Commerce (MOFCOM) jointly released MOF STA MOFCOM Announcement [2025] No. 2, introducing a new preferential tax policy aimed at encouraging overseas investors to reinvest profits earned from Chinese resident enterprises back into the domestic market. Effective from January 1, 2025, to December 31, 2028, the policy allows eligible investors to claim a 10 percent tax credit on qualifying reinvestment amounts, with unused credits carried forward indefinitely.

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The move comes at a time when China is seeking to stabilize foreign direct investment (FDI) and channel capital toward high-priority sectors such as advanced manufacturing, green energy, and innovation-driven industries. By offering targeted tax incentives and establishing clear regulatory parameters, the government hopes to attract long-term investors who are aligned with the country’s development goals.

This article breaks down the core elements of the new reinvestment policy—what benefits are available, who qualifies, and how to apply—and explores its connection to China’s broader efforts to create a more predictable, open, and investor-friendly business environment.

What benefits are available under the new tax policy for reinvested profits?

China’s new tax policy for reinvested profits offers a significant upgrade from the earlier profit reinvestment regime by providing a direct tax credit rather than merely deferring tax liabilities. This shift strengthens the financial appeal for overseas investors considering long-term capital commitments in China.

A 10 percent tax credit on qualifying reinvestments

From January 1, 2025, to December 31, 2028, overseas investors who reinvest profits earned from Chinese resident enterprises into qualified domestic projects may claim a 10 percent tax credit based on the reinvested amount. This credit can be used to offset the investor’s annual taxable income in China, offering a tangible reduction in overall tax burden.

Notably, if the credit cannot be fully utilized in the year of investment, unused amounts may be carried forward indefinitely indefinitely—even beyond December 31, 2028—until fully exhausted. This flexibility allows multinational investors with cyclical profits or complex holding structures to maximize their tax efficiency over time.

Compatibility with tax treaties

In cases where China has signed tax treaties that reduce the standard dividend withholding tax rate—for example, the China-Singapore treaty provides a five percent rate—the treaty rate continues to apply. This means investors from treaty countries can stack benefits, enjoying both a lower withholding tax and the new reinvestment credit.

Who can benefit? Eligibility criteria and investment scope

To ensure that the tax credit supports high-quality and productive investment, China’s new reinvestment tax policy sets out clear eligibility rules for both investors and the nature of the reinvestment. Only qualified reinvestments made during the policy period (2025–2028) can enjoy the benefit.

1. Eligible investors

The policy applies to overseas investors, including companies and individuals, that receive dividends or profit distributions from Chinese resident enterprises. To qualify:

• The distributed profits must derive from retained earnings (namely, accumulated and not previously reinvested or withdrawn); and
• The recipient must be a non-resident enterprise under Chinese tax rules.

2. Eligible forms of reinvestment

The reinvestment must be eligible domestic direct investment, including:

• Capital increases to existing Chinese subsidiaries;
• Greenfield investments (namely, setting up new enterprises);
• Acquisitions of non-listed domestic companies; and
• Purchases, capital increase, or acquisition of listed shares, but only if the investment qualifies as a strategic investment under securities regulations.

Purely financial or passive investments, such as short-term securities trading or portfolio investments in listed companies, do not qualify.

In addition, the reinvestment must be made directly using the distributed profits. Indirect or recycled funding through intermediate accounts or assets will disqualify the investment.

3. Sectoral restrictions: Focus on priority industries

The reinvested profits must be directed to enterprises operating in industries listed in the Catalogue of Encouraged Industries for Foreign Investment (Encouraged Catalogue), which includes industries such as:

• Advanced manufacturing;
• Renewable and clean energy;
• Modern agriculture;
• High-end equipment and components; and
• Digital infrastructure and high-tech services.

This requirement ensures that the tax benefit reinforces China’s broader economic upgrading and innovation strategies.

4. Five-year minimum holding period

To qualify for the tax credit, investors must commit to a minimum holding period of five years (60 months) for the reinvested assets. Early withdrawal, sale, or transfer of investment triggers a claw-back of the credited tax amount, which must be repaid within seven days of the disposal event. (More detailed rules introduced in the later section.)

This lock-in period reflects the government’s aim to encourage long-term, stable investment rather than short-term capital recycling.

Application process and compliance requirements

To access the reinvestment tax credit, overseas investors must follow specific procedural steps and comply with both tax authority requirements and MOFCOM’s foreign investment reporting regime. The process is designed to ensure transparency, proper documentation, and post-investment tracking.

Required documentation and submission process

Before the tax credit can be applied, overseas investors must prepare and submit a set of supporting documents to the profit-distributing enterprise. These typically include:

• Proof of profit distribution (such as board resolution, dividend declaration);
• Investment agreement or capital injection documentation;
• Confirmation that the reinvestment is made directly (namely, without interim transfers or third-party handling);
• Evidence that the reinvested enterprise falls under the Encouraged Catalogue; and
• A commitment to the five-year minimum holding period.

Once reviewed, the distributing enterprise may defer the withholding tax payment on the dividend, pending verification by the tax authorities.

MOFCOM information reporting for the reinvestment

To enhance regulatory oversight and policy execution, MOFCOM requires all qualifying reinvestments to be reported through its digital system: the Foreign Investment Integrated Management Application platform.

Through this platform, investors must provide:

• Basic information on the overseas investor (such as name, nationality/region, ownership structure);
• Industry classification and location of the reinvested enterprise;
• Amount of reinvested profits and transaction details; and
• Timing and method of capital contribution (such as cash, in-kind).

This centralized filing enables cross-agency coordination between MOFCOM, the STA, and local regulators and serves as the basis for post-investment supervision.

Verification and confirmation

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After the overseas investor submits the required reinvestment information, the local commerce authority in the jurisdiction of the investee enterprise will review and verify the submitted data. Once verified, the information is forwarded to the provincial-level commerce authority, which will coordinate with the relevant provincial finance, tax, and other departments to confirm that the reinvestment meets the policy criteria.

If approved, the provincial authority will issue a “Profit Reinvestment Confirmation Form” (利润再投资情况表), which includes the validated details and a nationally unique identification code. This confirmation is then provided by the investee enterprise to the overseas investor as supporting documentation for the tax credit application.

Additionally, the provincial commerce authority must consolidate and report this information to the corresponding provincial finance and tax authorities and submit a summary to MOFCOM within 15 days after the end of each quarter.

Ongoing reporting obligations and post-investment compliance

Overseas investors that have benefited from the tax credit and subsequently withdraw their reinvested capital must, through the investee enterprise and via MOFCOM’s Foreign Investment Integrated Management Application platform, report the following information to the local commerce authority where the investee enterprise is located: the name and nationality of the overseas investor, the names and locations of both the investee enterprise and the profit-distributing enterprise, and the time, industry sector, and amount of the capital withdrawal.

The local commerce authority will verify and cross-check the submitted information and forward it to the provincial-level commerce authority for confirmation. The provincial commerce authority is responsible for consolidating this data and, within 15 days after the end of each quarter, reporting it to the relevant provincial finance and tax authorities, as well as to MOFCOM.

Tax repayment and adjustment rules upon withdrawal of reinvested capital

To ensure that the reinvestment tax credit supports long-term capital retention in China, the policy imposes specific rules when overseas investors withdraw or recover their reinvested capital, particularly before the minimum holding period of five years (60 months).

Full withdrawal after five years: No claw-back, credit remains valid

If an overseas investor withdraws all or part of the reinvested capital after meeting the five-year holding requirement, the investment is considered to have fully complied with the tax credit conditions. However, the withdrawal of the reinvested amount is treated as a realization of the original deferred dividend income.

As such:

• The investor must declare and repay the deferred withholding tax related to the original dividend within seven days of the withdrawal, to the tax authority where the profit-distributing enterprise is located.
• Any unused portion of the tax credit (namely, the part carried forward from prior years) can be used to offset the payable tax at this point.

Early withdrawal before five years: Partial claw-back and credit adjustment

If the investor recovers the reinvested capital before reaching the five-year threshold, the reinvestment is considered non-compliant with the tax credit requirements, and the investor faces two consequences:

• First, as with post-five-year withdrawals, the investor must repay the deferred withholding tax within seven days of withdrawal.
• Second, the investor must proportionally reduce the total tax credit entitlement. If any portion of the tax credit has already been used in excess of the adjusted entitlement, the excess credit must be repaid as tax within the same seven-day window.

Mixed withdrawal: Prioritize credit-applied investments

In cases where the investor withdraws a portion of their reinvestment that includes both:

• Investments that have already received the tax credit benefit; and
• Investments that have not yet received or applied for the credit.

The policy treats the withdrawal as coming first from the credit-applied portion. This conservative approach prevents the avoidance of claw-back obligations by selectively withdrawing capital from untreated investments.

These rules serve a dual purpose: they protect the integrity of the tax credit policy and encourage genuine long-term commitment to investments in China’s strategic sectors. Investors should closely monitor their reinvestment timelines and maintain clear records to ensure compliance and avoid penalties.

Strategic implications for foreign investors

China’s new tax credit policy for reinvested profits is more than a fiscal incentive—it is a strategic tool designed to reshape foreign investment behavior in line with national development goals. For overseas investors, the policy presents both opportunities and considerations that go beyond immediate tax savings.

Reinforcing long-term commitment over short-term gains

The requirement to hold reinvested assets for at least five years signals China’s preference for stable, long-term capital. Investors seeking quick returns or short-term exits will not benefit from the tax credit and may be subject to claw-backs if they divest early. In this way, the policy encourages foreign stakeholders to take a strategic position in the Chinese market, particularly in ventures that require sustained development and capital input.

Alignment with national industrial priorities

By limiting eligibility to investments in sectors listed in the Encouraged Catalogue, the policy directly supports China’s industrial upgrading agenda. This sectoral focus allows foreign investors to align their China strategy with government-supported industries, increasing the likelihood of broader regulatory and policy support.

Shift from profit repatriation to domestic reinvestment

At a macro level, the policy reflects China’s strategy to retain foreign capital within its borders by incentivizing reinvestment rather than profit repatriation. By linking tax incentives to reinvestment into strategic sectors, the government is steering FDI from passive financial flows toward productive, value-added contributions to the domestic economy. For multinationals, this may prompt a reevaluation of dividend distribution strategies and open the door to expanding their China footprint via reinvested profits.

China’s broader foreign investment stabilization and promotion efforts

The new reinvestment tax credit policy is part of a wider set of measures introduced by China in recent years to retain and attract foreign capital. These efforts reflect the government’s recognition of the evolving global investment environment and its need to stay competitive amid mounting economic and geopolitical challenges.

China’s push to enhance its foreign investment regime is shaped by broader economic and policy goals:

• Economic stabilization: As global capital flows become more cautious, China seeks to restore investor confidence and ensure stable FDI inflows to support growth and employment.
• Supply chain localization and upgrading: The focus on reinvestment and encouraged sectors reflects China’s aim to strengthen domestic supply chains, reduce dependence on imports, and accelerate the transition to high-value, innovation-driven industries.
• Capital retention and reinvestment: Rather than allowing profits to flow out as dividends, the government is creating incentives for reinvesting earnings domestically, especially in projects that contribute to industrial development and green transformation. The new tax credit is a direct response to rising outward remittances and a strategic effort to convert foreign capital into long-term productive assets.

On February 19, 2025, China introduced a comprehensive action plan to stabilize foreign investment, reaffirming its commitment to high-standard opening-up and advancing economic modernization. Approved during a State Council executive meeting, the action plan outlines key measures to attract and retain foreign investment by expanding market access, easing financial restrictions, and fostering a fair business environment. With a focus on sectors such as biotechnology, telecommunications, education, and healthcare, the initiative seeks to enhance foreign participation in China’s industrial and service sectors.

At a regular press conference held on June 13, 2025, Li Yongjie, spokesperson for the Ministry of Commerce, emphasized that high-level opening-up remains a cornerstone of China’s national policy. In line with the decisions of the Third Plenary Session of the 20th Central Committee, Li announced several upcoming measures to support foreign investors in deepening their presence in China. These include further expanding market access—with pilot liberalization in areas such as cloud computing, biotechnology, and wholly foreign-owned hospitals—as well as orderly expansion in other service sectors. The MOFCOM also plans to revise and expand the Encouraged Catalogue and formulate new policies to support the reinvestment of profits by foreign enterprises into emerging and future industries in China. In addition, Li reaffirmed the government’s commitment to ensuring equal treatment for foreign enterprises, enabling them to participate fairly in government procurement and industrial upgrades. China will also continue to enhance service support for foreign investors through mechanisms such as foreign business roundtables, fast-track channels for key projects, and the “Invest in China” promotion campaign. These coordinated efforts aim to offer multinational companies greater long-term opportunities and foster a mutually beneficial investment environment.

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