China reacted to the global competition to attract new investment fueled by the US tax reform. According to new directive, the foreign companies will not have to pay taxes on profits they reinvest in the country. This decision will “foster growth in foreign investment, improve the quality of foreign investment, and encourage foreign investors to continuously expand their investments in China”, said the finance ministry in Beijing.
According to the ministry, the measure aims to exploit foreign investment more actively, to promote and improve its quality. To gain the right, foreign companies must invest in a government-approved list of sectors that Beijing wants to develop in particular.
The tax exemption will be applied retroactively from January 1, 2017. The companies that have already paid taxes over the past year will therefore be able to claim reimbursement.
The standard corporate tax in China is 25%. To benefit from the newly discovered tax concessions, the foreign companies have to meet several requirements. These include direct investment in industries promoted by the Beijing government. Also money should be directed directly to companies.
The foreign investment in China grew by only 1.9% in the first ten months of the year compared to the same period in 2016. In November, however, there was a sudden 90% jump that pushed up the index to 9.08% increase for the first 11 months of 2017.
According to experts, China is under pressure due to the ambitious US tax reform adopted shortly before Christmas. The tax changes to the Donald Trump administration, including the reduction in corporate tax from 35% to 21%, are expected to encourage US companies that are currently declining their profits abroad to take them back to the country.