China rolls out 10% tax credit for foreign investors reinvesting distributed profits domestically

Mechanism

Announcement 2025 No. 2, jointly issued by MOF, the State Taxation Administration and MOFCOM, lets a foreign investor credit 10% of the amount of profit distributed by a Chinese resident enterprise that it reinvests domestically (or the investor's home-country treaty withholding rate, if lower) against its own enterprise income tax liability. The credit is applied first against tax due on the current year's dividends/interest/royalties from the distributing enterprise, with unused amounts carried forward to future years. Qualifying reinvestment channels are capital increases, new domestic-enterprise establishment, or equity purchases from unrelated parties (listed- company share purchases are excluded except for qualifying strategic investments); funds must flow directly from the distributing enterprise's retained-earnings account to the reinvestment target without passing through intermediate accounts. The scheme runs 2025-01-01 through 2028-12-31, with reinvestments made between 2025-01-01 and the announcement's June 2025 publication eligible for retroactive claims.

Downstream implications

• Adds a fiscal lever to China's post-2023 push to stabilise inbound

FDI stock amid a multi-year decline in greenfield and reinvested- earnings flows, sitting alongside the 2025-12-24 Encouraged Foreign Investment Catalogue (Order 37) and negative-list liberalisation as part of the same inbound-FDI architecture.

• Because eligibility is gated on the Encouraged Industries Catalogue,

the credit functions as a targeting mechanism — it steers foreign reinvestment (not just total FDI stock) toward sectors Beijing wants capital retained in, rather than acting as an undifferentiated incentive.

• The 5-year hold requirement with proportional clawback discourages

round-tripping the credit through short-hold reinvestment cycles.

Open questions

• No total forgone-revenue or uptake estimate has been disclosed;

fiscal cost will only become visible in aggregate tax-expenditure reporting, if at all.

• Whether foreign investors are structuring incremental China

reinvestment specifically to capture the credit, versus reinvesting profits that would have stayed onshore regardless, is not yet observable from public data.