What Businesses need to know about China’s Changing Tax and Foreign Investment Policies


China is among the major global financial powers unveiling new tax laws and foreign investment policy changes in 2017 and 2018, as the country hopes to build on the $139 billion it earns annually in foreign direct investment—making it third in the world behind the U.S. and the U.K. in 2016.

China is in the midst of a major economic and tax reform campaign designed to ease regulations and restrictions for foreign companies doing business in the country, so what's happening now in the Pacific Rim's largest economy should be on the radar of any corporations dealing with foreign exchange issues overseas.

Heading into a potentially combustible 2018, what are those tax and foreign-exchange-related changes and what do they mean to corporate financial officers operating at the apex of the Pacific Rim? These five economic and tax trends will tell the tale—and it's a tale corporate foreign investment and tax specialists should get to know well.

Easier access to key industries

On the foreign exchange front, China is getting ultra-aggressive about lowering the threshold for international investment in critical country sectors like banking and finance, “clean" energy vehicle production, ship and aircraft design, manufacturing and maintenance, and insurance. China's State Council is relaxing the pre-entry process in those industries, and will upgrade the use of so-called “negative lists" that more clearly identify banned or restricted business and trade practices in China, providing foreign investors with clearer guidelines, and thus more transparency in accessing Chinese business markets. One particular provision in the State Council document makes it easier for foreign multinationals to establish headquarters in the country.

An easing of local government restrictions

   Foreign investors can now
   anticipate better deals and more
   lenient policies on key local
   Chinese issues, like taxes, land
   grants, and government subsidies.

To upgrade local Chinese economies, especially in cities and towns in more rural Central and Western China, the government's “Foreign Investment Catalogue in Central and Western China" is undergoing significant revisions and changes, specifically to provide foreign investors a cleaner, more transparent path to doing business in those regions. Foreign investors can now anticipate better deals and more lenient policies on key local Chinese issues, like taxes, land grants and government subsidies.

No withholding tax guidance

On the tax front, this new statute has particular relevance for companies engaged in mergers and acquisitions in China. The wrinkle is in China's State Administration of Taxation (SAT) Announcement, involving indirect transfers of Chinese assets. Now, indirect transfers may be taxable under Chinese tax law, and they could grow more complicated when adding in capital gains calculations and qualification for internal group restructure relief. Corporate tax accountants whose firms engage in China-linked M&A activity are advised to focus on SAT Announcement 37 and SAT Announcement 7 for proper guidance going forward.

New reinvestment statutes

Sign up with your email to receive
our weekly FX newsletter.

Corporate tax specialists should also take note of a recent reinvestment rule proposed by China's State Council that aims to defer the imposition of withholding tax on dividends paid outside the country, as long as the payouts went back into China in the form of reinvestments in what the State Council calls “encouraged projects." Going forward, corporate tax specialists operating in China should be apprised of specific industries included in the statute, and how the withholding tax deferment will be applied, and under what conditions.

Special focus on China VAT reforms

China has actually implemented new value-added tax reforms on a gradual basis since 2016, but what is new for 2018 is that inquiries and outright enforcement of the VAT tax should intensify. That's due to Chinese tax officials' drive to deploy data analytics to flag VAT hiccups and red flags, which can lead directly to an audit. Corporate tax officials should have in place, or be preparing to have in place, systematic “VAT health checks" to uncover any enforceable errors before China's tax officials find them first.

The above policy shifts impacting foreign investment in China aren't the only changes foreign investors will see in 2018. But there's no doubt that they're all at or near the top of that list, and corporate finance decision makers should be on top of all of them.