A profitable China subsidiary presents its foreign parent with an old question: take the dividend out, or leave the money in? Since 2025 the arithmetic has changed. A foreign investor who reinvests distributed profits into a qualifying Chinese business can claim a credit worth 10% of the reinvested amount against withholding tax. The catch is not in the rate — it is in the eligibility test, which turns on an industry catalogue that was replaced on 1 February 2026. A qualification assessment run against the old edition is no longer proof of anything.
- Announcement No. 2 of 2025 (Ministry of Finance, State Taxation Administration and MOFCOM, 27 June 2025) gives foreign investors a 10% credit on profits directly reinvested in China, for reinvestments made from 1 January 2025 to 31 December 2028.
- The credit rate is an election, not an automatic result: the investor chooses either 10% of the reinvested amount or the lower dividend rate under an applicable treaty — and the choice binds. Electing 10% gives the larger credit; electing the treaty rate gives a smaller one. See the election below.
- It offsets withholding tax on dividends, interest and royalties payable to that investor by the profit-distributing enterprise. Unused credit carries forward.
- The invested business must sit in the Catalogue of Encouraged Industries for Foreign Investment, and the 2025 edition took effect on 1 February 2026 — 1,679 national entries, of which 100 are new and 131 revised.
- The investment must be held for five years (60 months). Dispose earlier and the credit is recovered proportionally, repayable within seven days.
- This stacks with the 2018 withholding-tax deferral: deferral postpones the tax, the credit reduces it.
1. What the credit is — and what it is not
China has offered foreign investors a deferral of dividend withholding tax on reinvested profits since 2018. Deferral is a timing benefit: the 10% withholding tax on the dividend is not collected while the money stays invested, but it is still owed when the investment is unwound.
The 2025 policy sits on top of that and does something different. It grants a credit equal to 10% of the qualifying reinvested amount, which the investor uses to reduce actual withholding tax payable in China. Practically, that means an investor can both defer the tax on the reinvested dividend and hold a credit to apply against future withholding tax on dividends, interest or royalties from the same Chinese enterprise. Capital gains on an equity transfer are not, in principle, eligible for offset.
Two limits are worth stating plainly. It is not a cash refund — with no China-source withholding tax to pay, the credit sits unused, though it can be carried forward. And it is not automatic: it depends on conditions that are tested at the level of the enterprise you invest into, not at the level of your group.
2. Choosing the rate — 10% or the treaty rate
This is the part most summaries get wrong. The credit rate is not simply "the lower of 10% and your treaty rate". It is an election: when working out the credit, the investor may choose to calculate it at 10% of the reinvested amount, or at the dividend rate under an applicable double-tax treaty where that rate is below 10%.
The election has a price at the other end. Once a rate has been selected, the investor may not then apply a lower treaty dividend rate when the investment is withdrawn after the 60-month holding period and the deferred tax is declared and paid.
| You elect | Credit now | On unwinding after 60 months |
|---|---|---|
| 10% of the reinvested amount | Larger — 10% available against later dividends, interest and royalties | Cannot fall back on the lower treaty rate for the deferred tax |
| The treaty rate (e.g. 5%) | Smaller — 5% of the reinvested amount | Same restriction applies: the selected rate binds |
So the question is arithmetic, not automatic: how much Chinese withholding tax do you expect to have available to absorb the credit? An investor with a steady stream of Chinese dividends, interest or royalties can use a 10% credit and may prefer it; an investor with little to offset may find the difference academic. Decide this before filing, not after — the choice is not revisited later.
3. The conditions
All of the following have to hold:
- The investor is a non-resident. The profits are dividends or other equity-investment income distributed by a Chinese resident enterprise out of retained earnings actually realised.
- The reinvestment is direct. Permitted forms are increasing the capital of an existing Chinese enterprise, establishing a new one, or acquiring equity in a Chinese enterprise from an unrelated party. Purchases of listed shares are excluded unless they qualify as strategic investment.
- The money moves directly. Cash must be paid or transferred straight to the enterprise being invested in — not routed through other accounts on the way.
- The invested enterprise is in an encouraged industry, per the Catalogue of Encouraged Industries for Foreign Investment in force at the time.
- The holding lasts 60 months. See section 5.
Condition 4 is the one that quietly changed under everyone's feet.
4. The catalogue moved on 1 February 2026
The Catalogue of Encouraged Industries for Foreign Investment (2025 edition), issued jointly by the National Development and Reform Commission and MOFCOM, took effect on 1 February 2026, replacing the 2022 edition. The national catalogue now runs to 1,679 entries — 100 additions and 131 revisions — and the separate catalogue for the central, western and north-eastern regions to 1,060 entries, with 105 additions and 172 revisions. The stated direction of the revision is more advanced manufacturing, more modern services and more high-technology.
For most groups this is good news: the encouraged field got larger, and businesses that did not qualify before may qualify now. But the corollary is uncomfortable. If your eligibility memo was written in 2025 against the 2022 edition, it no longer establishes eligibility — entries were revised as well as added, and the description that matters is the one in the edition in force when the reinvestment is made. Two situations deserve a fresh look: a reinvestment planned for 2026–2028 whose qualification was assessed early, and a business that was told it was outside the catalogue and never revisited the answer.
One clarification that saves a lot of confusion: the encouraged catalogue is not the negative list. The negative list says where foreign investment is restricted or prohibited; the encouraged catalogue says where it is invited, and it carries benefits such as this credit, tariff exemptions on certain imported equipment and land-use support. A sector can be freely open and still not be encouraged. We cover the other instrument in China's foreign-investment negative list, explained.
5. How it is claimed
The procedure was set out by the State Taxation Administration in Announcement No. 18 of 2025. In outline, the reinvestment is put to the local commerce authorities, which pass it up for confirmation that the invested enterprise's business falls within the encouraged catalogue; the confirmation is issued to the foreign investor, who provides it to the profit-distributing enterprise. That enterprise is the withholding agent, and it applies the credit when withholding tax on subsequent payments to the investor.
Three practical points follow. The evidence sits with the invested enterprise — its actual main business, not its business-licence wording, is what the confirmation turns on. The paper trail has to show a direct cash path from the distributing enterprise to the invested enterprise. And because the credit is applied by the withholding agent, the group needs the confirmation in hand before the next distribution, not after.
6. The five-year clock, and what happens if you exit early
The reinvested equity must be held for five years — 60 months. If the investor withdraws or disposes of it earlier, the credit is recovered in proportion to the period not served, and the amount already claimed must be repaid within seven days of the recovery of the investment.
That timetable makes this a decision to take with the exit in view. A reinvestment used to fund a plant expansion the group intends to keep is a natural fit. Using the credit on a stake the group expects to sell inside three years converts a tax benefit into a repayment obligation with an unhelpfully short fuse. And because the deferral and the credit interact, the unwind should be modelled together: the deferred withholding tax on the original dividend becomes payable at broadly the same moment.
7. So: take the dividend, or leave it in?
The credit does not change the fundamentals of getting money out of China — the audit, the loss make-good, the statutory reserve allocation and the 10% dividend withholding tax (often 5% under a treaty) all still apply, and we set them out in getting profits out of China. What it changes is the comparison. Where the group was going to fund a China expansion anyway, funding it out of accumulated China profits now carries a benefit worth 10% of the amount deployed, on top of not paying the withholding tax on the way out and again on the way back in.
The analysis that decides it is short: is the target business genuinely inside the 2025 catalogue; will the group hold for 60 months; and does it have enough China-source withholding tax coming to actually use the credit? If all three are yes, this is one of the few China incentives that is worth restructuring a funding plan around. If any is no, take the dividend and keep the flexibility.
Frequently asked questions
The investor elects the rate: either 10% of the qualifying reinvested amount, or the lower dividend rate under an applicable double-tax treaty. It is a choice, not an automatic application of the treaty rate — and once selected the rate is binding, so the lower treaty rate cannot be claimed again when the investment is unwound after 60 months and the deferred tax falls due. Electing 10% gives the larger credit but gives up that later treaty benefit. The credit reduces withholding tax payable in China and any unused balance can be carried forward.
Withholding tax on dividends, interest and royalties payable to the same foreign investor by the enterprise that distributed the profits. Capital gains on an equity transfer are not eligible in principle. The credit is not refundable in cash, so it is only worth what you have China-source withholding tax to apply it to.
Yes. The enterprise receiving the reinvestment must operate in an industry listed in the Catalogue of Encouraged Industries for Foreign Investment in force at the time. The 2025 edition took effect on 1 February 2026 with 1,679 national entries, so eligibility assessed against the earlier edition should be re-tested.
The credit is recovered in proportion to the unexpired part of the 60-month holding period, and the amount already claimed must be repaid within seven days of recovering the investment. Deferred withholding tax on the original dividend also generally falls due on the unwind, so the two should be modelled together.
No, and they stack. The 2018 policy defers dividend withholding tax while profits stay reinvested; the 2025 announcement adds a credit equal to 10% of the reinvested amount. Deferral is a timing benefit; the credit is a reduction in tax actually paid.
Sources
- State Taxation Administration Announcement No. 18 of 2025 — implementation of the reinvestment tax credit (official text; Article 4 sets out the rate election and the restriction on later applying a lower treaty rate).
- gov.cn — China rolls out 10 percent tax credit for foreign investors reinvesting dividends (policy period 1 January 2025 to 31 December 2028; encouraged-catalogue requirement).
- EY — Mainland China announces tax credit policy for foreign investors making direct reinvestments (Announcement No. 2 of 2025, 27 June 2025; permitted forms of reinvestment; direct cash payment).
- China Briefing — China offers 10% tax credit on reinvested profits (60-month holding period; proportional claw-back repayable within seven days; interaction with the 2018 deferral).
- gov.cn — China unveils new Catalogue of Encouraged Industries for Foreign Investment (2025 edition, effective 1 February 2026; 1,679 national entries and 1,060 regional entries).
- China Briefing — China releases the 2025 Encouraged Catalogue for foreign investment — additions and revisions by sector.
- Internal: getting profits out of China; China's foreign-investment negative list, explained; how to set up a WFOE in China.
This article is general information for foreign companies, not legal advice on any specific matter. Rules and practice change; please take advice on your facts.