CHINA Trends and Developments Contributed by: Min Zhu, Ya-ling (Michelle) Gon, Yang (Aaron) Gu, Chai Lu, Ying Li and Shiye Yuan, Han Kun Law Offices
cost optimisation while ensuring compliance, com- panies should carefully review tax-related clauses in contracts, improve the allocation and documentation management of R&D expenses, and establish an embedded internal control mechanism for tax com- pliance. Reinvestment tax holiday In 2025, the Chinese government introduced a new reinvestment tax credit scheme to attract and stabilise foreign investment within China. This policy represents a significant upgrade from the previous reinvestment deferral mechanism. Under the new scheme, eligible foreign investors who directly reinvest profits derived from China into encouraged industry projects will con- tinue to enjoy the deferral of withholding tax and also receive an additional tax credit allowance equivalent to 10% of the reinvested amount. This credit can be used to offset future taxes payable on future income that the enterprise derives from its investments. This implies that foreign investors who reinvest their earn- ings in China may effectively achieve a permanent exemption from withholding tax, subject to other con- ditions such as a five-year holding period. For biop- harmaceutical companies, the tax credit scheme pre- sents an opportunity to significantly reduce effective tax burdens. This is especially so for pharmaceutical multinationals of a certain scale of profits that plan to expand production capacity or R&D centres in China. Abolishing financial subsidies In 2025, the Chinese government further advanced the development of “a unified national market” and exerted pressure on local authorities to abolish financial sub- sidy policies. In prior years, many pharmaceutical com- panies were able to obtain some financial support from local governments, often tied to the scale of their tax
payments. However, since 2025, such financial incen- tives have become increasingly unstable and appear unsustainable over the medium to long term. This trend has been reinforced by new regulations jointly issued by four central government ministries in 2025, which aim to further standardise investment promotion activi- ties and explicitly prohibit local governments from link- ing financial rewards or subsidies to the tax payment amounts of enterprises. As a result, many previously signed “case-by-case” financial support agreements now face suspension or cancellation. This change in government practice is compelling companies to recali- brate their investment evaluation models, eliminating reliance on implicit financial subsidies, and shifting their focus towards compliant and sustainable operational efficiency improvements. Strengthened tax administration To protect the tax revenue base, tax authorities at both the national and local levels have significantly strengthened the administration of routine tax filing and have intensified tax inspections across multiple levels and dimensions. In light of this, biopharmaceu- tical enterprises should pay special attention to the following tax compliance matters: • the authenticity of selling expenses, where tax authorities are strictly investigating marketing and conference fees (including payments to contract sales outsourcers); • the compliance of high-tech enterprise qualifi- cations, with a focus on the allocation of R&D expenses and the ownership of IP; and • cross-border transactions, particularly the compli- ance of withholding tax on outward payments and the potential identification of permanent establish- ment risks.
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