How the New China Tax Incentive Will Benefit Foreign Investors

China is now effectively paying foreign investors to stay and reinvest. Through  Circular 2025 No. 2 (“Circular 2025-2”) (a development of the original Circular Caishui [2018] No. 102 (“Circular 102”)), the Chinese Ministry of Finance and State Administration of Taxation now offer a 10% tax credit on profits reinvested within China, effective from 1 January 2025 through 31 December 2028.

This policy shift creates immediate financial advantages for companies reinvesting profits in China. Instead of merely postponing withholding tax payments on distributed profits, qualifying foreign investors can now claim a 10% tax credit on reinvested amounts – a credit that reduces actual tax liability and can be carried forward indefinitely.

For business leaders evaluating China investment strategies, these changes present clear opportunities to improve after-tax returns while supporting long-term growth objectives. Companies that have already reinvested profits since January 2025 can apply retroactively, potentially recovering significant tax amounts. Those planning future investments can structure deals to maximise these benefits across multiple years.

This analysis shows exactly how foreign investors can benefit from the new China tax incentive, what documentation requirements apply, and which strategic moves maximise the financial benefits. For companies with existing China operations or those considering expansion, these incentives fundamentally improve the economics of Chinese investment decisions.

Understanding the Circular 102 Policy Evolution

From Circular 102 to Circular 2025-2 

Since 2017, Circular 102 has allowed foreign investors to defer the standard 10% withholding tax on dividends when those profits were reinvested directly within China. The tax became payable only upon investment recovery or withdrawal. This deferral system provided cash flow benefits but offered no permanent tax savings.

Circular 2025-2 transforms this approach. Foreign investors can now claim actual tax credits equal to 10% of qualifying reinvested amounts, not just defer payments. These credits offset future withholding taxes on dividends, interest, royalties, and service fees received from Chinese operations. Any unused credits carry forward without expiration, creating lasting value for investors with multiple Chinese income streams.

Retroactive Application Creates Immediate Value

The policy applies retroactively from 1 January 2025, meaning companies that have already reinvested profits this year can claim credits for those transactions. Credits apply to withholding taxes reported after 27 June 2025, creating immediate opportunities for tax recovery. This retroactive feature allows investors to capture value from reinvestments made before the policy was announced, turning past business decisions into current tax advantages.

Tax Credit Mechanics and Benefits

Credit Calculation and Application

Put simply, qualifying reinvestments create tax credits worth 10% of the reinvested amount. These credits directly reduce withholding tax obligations on future Chinese-sourced income, including dividends, interest payments, royalties, and service fees. Companies can apply credits immediately upon receiving qualifying income or bank them for future use – there is no expiration date on unused credits.

Most beneficially, the credit system operates through self-assessment, meaning investors claim credits when filing withholding tax returns rather than seeking pre-approval. This streamlined approach reduces administrative burden while providing immediate tax relief. Credits apply against actual tax liabilities, not just deferred amounts, creating genuine cost savings for qualifying investors.

Double Taxation Treaty Benefits

Companies also benefit from favourable treaty rates when claiming credits. Where Double Taxation Agreements provide dividend withholding tax rates below 10%, the lower treaty rate determines maximum credit eligibility. Hong Kong SAR, Singapore, Germany, and UK investors typically qualify for 5% rates, meaning CNY 10 million reinvestments generate CNY 500,000 in usable credits rather than the full CNY 1 million.

This treaty integration prevents over-crediting while maximising legitimate tax benefits. Companies with operations across multiple jurisdictions can structure investments to optimise both treaty benefits and credit utilisation.

Qualifying for Tax Credits

What Investments Generate Credits

Only direct business investments qualify for credits. Capital increases in existing Chinese operations, establishing new companies, and acquiring shares from unrelated parties all generate the 10% credit. Listed company investments don’t qualify, as China wants to reward actual business expansion, not portfolio shuffling.

Your target company must operate within China’s Catalogue of Industries Encouraging Foreign Investment. This covers the following sectors:

• Agriculture, Forestry, Animal Husbandry & Fishery

• • • Planting, Cultivation & Production
    • Forestry & Undergrowth Ecological Cultivation
    • Livestock, Aquaculture & Breeding
    • Agricultural Technology, Services & Digital Transformation
    • Resource Utilisation & Development

• Mining

• • • Exploration & Exploitation of Oil, Gas & Minerals
    • Mining Technology & Services

• Manufacturing

• • • Food, Beverage & Agricultural Product Processing
    • Textiles, Apparel & Special Natural Fibres
    • Chemicals, Coatings, Resins & Synthetic Materials
    • Pharmaceuticals, Vaccines & Medical Materials
    • Automobiles, New Energy Vehicles (NEVs) & Key Components
    • Aerospace, Marine & Transportation Equipment
    • Electronics, Integrated Circuits & IT Equipment
    • General & Special-Purpose Machinery & Equipment
    • Non-metallic Mineral Products & New Materials
    • Metal Products & Non-ferrous Metal Smelting

• Power, Utilities & Transport

• • • Energy Generation (Thermal, Hydro, Nuclear, New & Renewable)
    • Utilities, Grids & Infrastructure
    • Transport Networks (Rail, Road, Air, Sea) & Logistics

• Services

• • Information Technology, Software & E-commerce
  • Business, Financial & Professional Consulting
  • Scientific Research & Development
  • Health, Social Work & Elderly Care Services
  • Education & Vocational Training
  • Culture, Tourism & Sports

The Five-Year Commitment Rule

Credits come with some conditions. Withdraw investments within five years and you’ll repay credits proportionally. For example, if you withdraw your investment after three years, you’ll keep 60% of the claimed credits and repay the rest, plus interest, within seven days. This structure rewards patient capital while discouraging quick exits.

Money must flow directly between parties. No intermediary accounts, no complex routing structures. Funds must travel straight from your dividend-paying Chinese company to the target company or share seller. Securities are transferred directly without temporary custody arrangements. This transparency requirement eliminates structures that could obscure true investment intent.

How to Get Official Approval

Target companies handle the paperwork through China’s Ministry of Commerce (MOFCOM) Unified Platform. Local commerce authorities review submissions before provincial teams from commerce, finance, and tax departments jointly assess eligibility. Approved applications receive a coded Profits Reinvestment Confirmation Form, which is your ticket to claiming credits on future Chinese-sourced income. The process typically takes several weeks, so factor timing into investment planning.

Strategic Investment Opportunities 

Sector-Specific Benefits 

The standout investment opportunity is green technology, as it hits two targets simultaneously.  China’s leadership in the green space is evidenced by its $290 billion in green energy investment in 2023 alone, and its role in producing over 70% of the world’s electric cars. All relevant sectors, from EV components and energy storage to smart grids, are listed in the encouraged industries catalogue.

Similarly, artificial intelligence and advanced manufacturing present clear opportunities. Profits in high-tech manufacturing surged 18.9% in July 2025, led by a remarkable 176.1% jump in the integrated circuit sector. This aligns with a KPMG outlook identifying AI as the industry’s top revenue driver. Further, China now commands 54% of the global industrial robotics market, while its biomedicine sector saw profits climb 36.3%, underscoring the strong domestic demand in areas targeted for modernisation.

Looking at the broader picture, the Catalogue of Industries Encouraging Foreign Investment spans hundreds of specific business activities across sectors from agriculture to financial services. Finding opportunities that align with your strategic objectives while maximising tax benefits requires local expertise. Working with trusted partners like InCorp helps identify qualifying investments that match your business goals rather than forcing strategic decisions around tax considerations alone.

Risk Management and Planning 

Plan investments to maximise credit utilisation over multiple years. Companies with regular Chinese income streams can structure reinvestments to generate steady credit flows rather than lump-sum benefits. This approach smooths tax savings across reporting periods while building substantial credit reserves for future use.

Early reinvestors gain first-mover advantages. Credits from January 2025 investments can offset taxes due throughout the four-year programme period, creating compounding benefits. Companies waiting until late 2028 forfeit years of potential credit accumulation and face rushed investment decisions as the programme expires.

Where to Next With InCorp

China’s new tax credit system transforms reinvestment economics for foreign investors. The 10% credit on qualifying investments creates genuine tax savings that compound over time, while retroactive application allows companies to recover costs from 2025 reinvestments already completed.

Success, of course, requires understanding industry eligibility, meeting five-year holding requirements, and managing direct transfer obligations. Companies that act quickly capture maximum benefits from the four-year programme window while positioning themselves in China’s priority sectors.

InCorp’s specialists help foreign investors identify qualifying international opportunities, structure compliant investments, and manage administrative requirements. Our team handles investment applications, coordinates approvals, and ensures proper documentation for your tax filings. Contact InCorp today to evaluate your investment opportunities and maximise tax benefits in 2025 and beyond.