CHINA Trends and Developments Contributed by: Ying Ding, Shihui Partners
Enhanced follow-up tax administration To support entrepreneurship and innovation, China has introduced a series of tax and fee reduction poli - cies since 2018. For example, the research and devel - opment super-deduction provided under the Corpo - rate Income Tax Law (CIT Law) – generally available to enterprises except those in negative-list industries – was increased to 75% in January 2018, and further raised to 100% in October 2022. At present, most tax incentives can be claimed by tax - payers on a self-assessment basis, especially for cor - porate income tax (CIT) purposes. No prior approval from the tax authorities is required. However, taxpay - ers must retain relevant documentation for follow-up tax administration, inspections or audits. At the same time, the tax authorities have increased scrutiny in follow-up tax administration, examining the truthfulness and reasonableness of taxpayers’ eligibil - ity and claims for tax incentives. In circumstances of abuse of tax incentives, tax fraud or tax evasion, taxpayers will need to pay outstand - ing taxes, late-payment surcharges and penalties, as applicable. Starting from the 2025 tax year, the STA has frequently disclosed cases involving abuse or misuse of tax incentives. Notably, the application of tax treaties also adopts the self-assessment method. Practice indicates height - ened scrutiny in determining beneficial owner (BO) status. There has been a rise in cases where the tax authorities have denied non-resident taxpayers’ BO claims. Consequently, non-resident taxpayers have been required to pay outstanding taxes, together with late-payment surcharges or interest. (See also the section below titled “Non-resident taxpayers: enti - tlement to treaty benefits”.) Taxation of Non-Resident Enterprises For CIT purposes, non-resident enterprises (including foreign corporations and partnerships) are generally subject to a 10% withholding rate on their China- sourced income. As provided in applicable tax trea - ties, the withholding rate could be lower.
Tax incentives for foreign reinvestment Starting from the 2017 tax year, qualified foreign insti - tutional investors have been eligible for a tax deferral policy in respect of distributed profits (dividends) from their Chinese subsidiaries. If the distributed profits are directly used for eligible reinvestment in China (with - out remittance overseas), foreign investors are tem - porarily exempt from the 10% (or lower treaty rate) withholding tax on the distributed profits. In February 2025, the STA reported that a total of CNY162 billion was reinvested in China in 2024 as a result of the tax deferral policy. More remarkably, in June 2025, China further intro - duced a new tax credit policy for eligible reinvestment, effective from 1 January 2025 to 31 December 2028. Qualified foreign investors will be granted a calculated amount of tax credit. They can use the tax credit to offset future withholding tax liabilities on income from the same distributing subsidiary. With careful structuring, foreign investors may benefit from both policies, potentially achieving full exemption from withholding tax on the distributed profits. However, the eligibility conditions for the two incen - tives differ. For example, the tax credit policy requires a minimum five-year holding period in respect of the reinvestment. Failure to satisfy the holding period requirement may result in the forfeiture or adjustment of the previously claimed tax credit, meaning retroac - tive payment of withholding taxes plus late-payment surcharges. A controversial issue concerning foreign-invested partnerships Under domestic law, a domestic partnership is treated as a “pass-through” entity for income tax purposes. Accordingly, in a foreign-invested domestic partner - ship structure, the foreign partner(s) are liable for CIT on income received by the partnership. Meanwhile, the CIT Law provides a concept of “estab - lishment or place”. If a non-resident enterprise has an “establishment or place” in China, it is liable for CIT on:
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