China announced a new incentive regime aimed at encouraging foreign investors to reinvest profits onshore. The policy would offer cash flow benefits where the prerequisite conditions are satisfied.

What is on offer?

In June 2025, China’s Ministry of Finance, State Taxation Administration (STA), and Ministry of Commerce jointly issued Public Notice No. 2 [2025] (PN2)[1] to enhance the country’s dividend withholding tax (WHT) deferral regime by introducing a new tax credit mechanism. On July 31, 2025, the STA followed up with an official interpretation and further issued Public Notice No. 18 [2025] (PN 18) to provide detailed implementation rules to PN2.

Under PN2, tax credit is available to foreign investors who reinvest profits distributed from a China subsidiary into qualified equity investments (e.g., by way of capital increases, greenfield ventures, or nonaffiliated share acquisitions, etc.) within China between 1 January 2025 and 31 December 2028.

Qualifying reinvestments can benefit from both:

• WHT deferral at the time of profit distribution
• Additional tax credit (of up to 10% or applicable lower tax treaty rate of the reinvestment amount) to offset future WHT payable on dividends, royalties, or interest received from the same China entity

In order to qualify for such incentive, the reinvestment should align with China’s encouraged industries and satisfy the specified procedural and holding requirements. There is also a time commitment required. Specifically, a disposal of the reinvestment within five years may trigger a clawback of the tax benefit enjoyed.

Strategic Benefits and Path Forward

From the tax and treasury perspectives, the new policy could potentially offer significant upsides for foreign investors, including but not limited to the following:

• Improving cash flow management: The immediate deferral of WHT payment would preserve cash that may be used for business expansion.
• Creating potential tax savings: The tax credit could directly reduce future WHT liabilities with no requirement to pay the tax amount credited if the specified conditions are met.

However, careful planning and management is required in order to secure such benefits. Foreign investors should ensure they can satisfy the specified conditions, specifically:

• Investments in specified industries: Only equity investments in “national-level encouraged industries” are eligible; that is, regional catalogues do not suffice.
• Same entity limitation: The tax credit is non-transferable and can only be used to offset against WHT payable on income from the same entity; that is, WHT payable on income from other affiliates would not be creditable even if it is received by the same foreign investor.
• Holding period: Disposal of the investment within five years of reinvestment would trigger a clawback of both the tax deferred and credited (if any).
• Compliance of filing and registration obligations: There is an intensive compliance process that needs to be completed, including pre-filing with MOFCOM, obtaining confirmation from provincial-level authorities, and performing central registration.

Therefore, qualifying companies would need to pay close attention to the details of the requisite conditions, ensure that proper paperwork is in place, and actively communicate with the relevant government authorities throughout the process to ensure the tax and cash flow benefits can be obtained.

Hypothetical case

We illustrate in the table below the additional benefits that can be obtained under the new policy using an example where a European parent company receives a dividend of RMB 100 million (M) from its China subsidiary (Co C) and revests the entire amount into qualifying investment projects under its China expansion plan

As shown above, the new incentives enable the company to enjoy zero cash tax, a tax credit that can be used to offset future tax liabilities, and an optimized return on investment (ROI) for future investment, if planned and executed properly.

Having said that, multinationals are advised to take into consideration other international tax implications such as the impact on/availability of foreign tax credit, Pillar Two implications, etc., in order to make an informed decision.

How A&M Can Help

PN2, together with its official interpretations and PN18, set out a range of technical requirements, including credit eligibility, timing, currency conversion, partial disposals, and retroactive application that are critical to correctly applying the reinvestment tax credit. These provisions are nuanced and may have a significant impact on reinvestment planning and repatriation strategies. Multinational investors should conduct a thorough review of the new rules to understand the implications on their China reinvestment structures.

A&M assist clients in developing practical, actionable plans to navigate these complexities and fully leverage the available incentives while ensuring alignment with broader global tax strategies. Our integrated and hands-on international tax teams can support you in:

• Evaluating the eligibility to the new incentives
• Advising on reinvestment structures and location studies
• Modeling out after-tax ROI and global tax impacts
• Assisting in tax treaty relief applications
• Coordinating with relevant governmental departments including tax, commerce, and finance authorities
• Managing the end-to-end implementation aligned with your global tax and treasury strategy

We also support scenario analysis and risk management for clients who are concerned about potential impact(s) due to early exits or change in investment plans by assisting clients to engage directly with the tax authorities where needed.

Final Thoughts

China’s new tax credit regime presents a great opportunity to optimize cash flow for companies with China expansion plans and potentially enhance their overall tax efficiency. Nevertheless, it is not a plug-and-play game. It requires careful planning, thoughtful alignment with global tax positions, and robust documentation from day one.

For multinationals with retained earnings in China and long-term plans to grow in China, this incentive policy requires a thorough consideration as part of their China growth strategy.

[1] “Tax credit policy to encourage foreign investment,” The State Council, People’s Republic of China, updated August 6, 2025, https://english.www.gov.cn/policies/policywatch/202508/06/content_WS6892b4dec6d0868f4e8f4ace.html