TAX REFUND FOR RE-INVESTMENT WITH PROFIT BY FOREIGN INVESTOR

PART ONE: WHAT IS TAX REFUND FOR RE-INVESTMENT?

Tax Refund for Re-investment is a preferential tax policy adopted by the Chinese government for the purpose of encouraging foreign investors in the existing Chinese-foreign equity joint venture companies, Chinese-foreign cooperative joint venture companies and wholly foreign-owned enterprises (“Foreign-invested Company”) to re-invest with their profit obtained from the Foreign-invested Company into China’s domestic enterprises.

In accordance with Income Tax Law of the People’s Republic of China on Enterprises with Foreign Investment and Foreign Enterprises and Rules for the Implementation of the Income Tax Law of the People’s Republic of China on Enterprise with Foreign Investment and Foreign Enterprises, there are following situations for tax refund for re-investment:-

1. Any foreign investor of Foreign-invested Company who reinvests directly its profit obtained from Foreign-invested Company into that company by increasing its registered capital, or uses the profit as capital investment to establish other foreign-invested company and operates it for a period of no less than 5 years, shall, upon the approval by the tax authorities to the application filed by the investor, be refunded 40 percent of the income tax already paid on the reinvested amount. In the event that the foreign investor withdraws its reinvestment before the expiration of term of 5 years, it shall repay the refunded tax.

2. Any foreign investor of Foreign-invested Company who reinvests directly its profit obtained from Foreign-invested Company and sets up and/or expands export-oriented company or advanced technology company and operates it for a period of no less than 5 years, shall, upon the approval by the tax authorities to the application filed by the investor, be refunded 100 percent of the income tax already paid on the reinvested amount. In the event that the foreign investor withdraws its reinvestment before the expiration of term of 5 years, it shall repay the refunded tax.

3. Any foreign investor of Foreign-invested Company in the area of Hai Nan Special Economic Zone who reinvests directly its profit obtained from Foreign-invested Company in infrastructure projects and/or agriculture development company in the Zone and operates it for a period of no less than 5 years, shall, upon the approval by the tax authorities to the application filed by the investor, be refunded 100 percent of the income tax already paid on the reinvested amount. In the event that the foreign investor withdraws its reinvestment before the expiration of term of 5 years, it shall repay the refunded tax.

The term of “reinvest directly” in above situations refers to profit obtained from Foreign-invested Company by foreign investor which prior to receipt is directly used to increase registered capital, or which following receipt is directly used to invest other foreign-invested company, including (i) setting up a new foreign-invested company with its registered capital from the profit; (ii) increasing registered capital of an existing foreign-invested company with the profit.

However, in the event a foreign investor purchases equity interest of other investors in an existing company, including the Foreign-invested Company, with profit obtained from Foreign-invested Company and such purchase does not increase registered capital and operation capital for that existing company, the foreign investor is not entitled to tax refund.

No tax refund can be enjoyed by a foreign investor in the event the foreign investor re-invests its income gained from liquidation of Foreign-invested Company.

According to a BOD resolution, Foreign-invested Company can use its accumulation fund or development fund or reserve fund which is drawn from the after-tax profit as reinvestment and increase its registered capital. The foreign investor is also entitled to tax refund for the part of such reinvestment which belongs to foreign investor.

PART TWO: WHO CAN ENJOY TAX REFUND POLICY?

Generally speaking, foreign investors in Foreign-invested Company can be entitled to the tax refund and their Chinese partners cannot enjoy it.

In addition, investment company whose equity interest is 100% held by foreign investor in China can be deemed as foreign investor and can also enjoy the tax refund when it reinvests the profit from foreign-invested company in the territory of China.

PART THREE: THE PROFIT COVERAGE

In accordance with Income Tax Law of the People’s Republic of China on Enterprises with Foreign Investment and Foreign Enterprises, foreign investor can apply for tax refund when it reinvests directly with the after tax profit. Such profit shall be the profit that has been realized and belongs to the foreign investor according to its investment proportion in Foreign-invested Company.

In addition, Foreign-invested Company, according to its BOD resolution, uses its accumulation fund, development fund or reserve fund which is drawn from the after tax profit as reinvestment and increases its company registered capital. Tax refund is applicable to the part of such reinvestment which belongs to the foreign investor.

However, foreign investor cannot be entitled to tax refund for reinvestment with following profits:-

1. Foreign investor acquires the equity interest of a foreign-invested company through purchasing equity interest from shareholders of such company. The profit already realized prior to such equity interest transfer;

2. Prior to distribution of profit, the profit that has already been transferred outside of Foreign-invested company through transaction between affiliated companies;

3. The profit that will be realized in the future and the foreign investor promises to use it as reinvestment. However, actually such profit shall complement as part of the registered capital;

4. The profit that foreign investor has already remitted outside of China and then uses it as reinvestment.

PART FOUR OPERATION PERIOD

In Part one we mentioned the operation period shall be no less than 5 years. If foreign investor reinvests directly with profit into its company where it obtains the profit or other foreign-invested company which has already started production and operation (including trial production and operation), the operation period starting from the date of actual input of reinvestment capital shall be no less than 5 years. If foreign investor uses the profit to establish a new foreign-invested company, the operation period starting from the date of production and operation (including trial production and operation) shall be no less than 5 years.

However, for the reasonable business purpose, in the course of corporate restructure, if foreign investor, including investment company which is 100% held by the foreign investor, transfers its reinvestment equity interest to a company which is owned directly or indirectly by the same foreign investor, or is owned by an entity/individual who also 100% controls the foreign investor, such transfer will not be deemed as withdrawal of reinvestment and refunded tax can be kept by the foreign investor.