China: new measures to boost foreign investment

Recently, China published Circular of the State Council on Several Measures to Boost the Growth of Foreign Investment (Guo Fa [2017] No. 39, referred to hereinafter as the “Circular”), issuing general guidelines on further encouraging foreign investment in China.

It is expected that the Circular can promote the growth of foreign investment and improve the quality of foreign capital utilization by implementing more supporting policies. The major measures included in the Circular are summarized as follows:

Reduction of foreign capital restrictions
Fiscal and taxation supporting policies
Cross-border mobility of talents
Conclusion

1. Reduction of foreign capital restrictions

The Circular demands the further implementation of the negative list administrative system for foreign investment. Market access is also required to be expanded in order to allow foreign capital to enter into more industries. The expanded industries include the manufacturing of new-energy vehicles, banking, securities, insurance, etc. This suggests that China aims to loosen the restrictions on the business sectors which allow the foreign enterprises to operate, and at the same time to enhance the standardization management of foreign investment.

2. Fiscal and taxation supporting policies

The Circular suggests the implementation of various fiscal and taxation beneficiary policies. Firstly, the profits obtained by foreign investors from resident enterprises in China and directly reinvested in encouraged investment projects will be entitled to the tax deferral policy and accordingly be exempted temporarily from withholding tax obligations. At present, foreign investors are subject to a 10% withholding tax when they receive dividends from Chinese enterprises, provided that no double taxation agreement benefits can be applied, even the dividends are used for the re-investment in China. It can be expected that the tax deferral policy will undoubtedly significantly ease the tax burden of foreign enterprises and also improve their cash liquidity utilization, motivating foreign enterprises to leave profits in China in a longer term.

In addition, the Circular also covers other supporting policies, including promoting preferential enterprise income tax policies designed for technically advanced service enterprises that are located in demonstration cities featuring service outsourcing to the whole country, encouraging multinational companies to establish regional headquarters in China, directing foreign capital to western and northeastern China, and encouraging overseas investment of Chinese enterprises. These policies aim to direct foreign capital into the advanced service sectors with more added values as well as economically less developed areas, thus promoting the development of service industry and regional economy.

3. Cross-border mobility of talents

The Circular clearly states that in 2018, the administrative regulations for foreigners working in China will be announced to standardize the system of granting work permits to foreign talents. Meanwhile, in the second half of 2017, implementing rules on the visas issued to foreign talents will be published in an attempt to extend the valid period of their visa. As an important part of attracting foreign capital, the management on talent acquisition in China is not very regulated. This time, the Circular states clearly the schedule of the reform, indicating the State Council’s determination to improve existing problems as soon as possible to remove the barriers of attracting foreign capital.

Conclusion

In summary, the release of the Circular signals the further opening-up of Chinese economy to the world. Also, it suggests China’s continuing huge demand for the foreign capital. In terms of the content, the Circular mainly covers three aspects. The first is increasing the support for foreign capital, which is mainly reflected in various fiscal and tax beneficiary policies. The second is directing foreign capital to invest in targeted sectors and areas to accelerate China’s industrial transform and regional development. The third is improving foreign investment circumstances by improving laws and regulations.

For foreign enterprises, the Circular is no doubt good news. It is to be noted that the Circular serves more as a guideline, while the detailed policy implementations are still to be made by the relevant department in-charge. As for the taxation on the dividends income, the tax deferral policy is only applicable if the profits obtained by foreign enterprises are directly reinvested in encouraged projects. However, the definition of encouraged projects is yet to be determined. Also, some practical problems, such as when the deferred withholding tax should be paid in the future, whether it could enjoy the treaty benefit published later when actually being taxed, and whether the retained earnings generated before the issuance of the Circular are entitled to the policy, are still not clearly explained. Therefore, foreign enterprises are suggested to wait till the detailed implementation rules are issued to make self-assessment on if they are applicable to the potential beneficiary policies based on current situations and evaluate the necessity of adjusting their future investment strategy for China.