Member Article

The State Administration for Taxation issued the Reply of the State Administration of Taxation on Issues relating to Tax Refund for Reinvestment by Foreign Investors on 20 October 2005. The Reply explains the conditions under which a foreign investment enterprise (“FIE”) can obtain a rebate on its enterprise income tax (“EIT”) for re-investment of its profits if such re-investment is made in instalments or in phases. Re-investment For the purpose of the Reply, re-investment of profits means when an FIE uses its profits to directly invest in itself or another FIE, to increase its registered capital or the registered capital of another FIE or to invest in the establishment of another FIE. When the relevant contract provides that the re-investment shall be made in instalments or in phases and such re-investment has been properly approved by the relevant authorities, the FIE can enjoy the relevant EIT tax rebate for re-investment provided the profit has been realised. It does not matter in such case whether the investment is made in a lump-sum or in instalments. However, if the relevant profits have not or only partially been realised at the time the re-investment plan is approved by the authorities, the FIE shall not be able to enjoy the EIT tax rebate for re-investment. The tax authorities will regard this solely as a supplement to the registered capital of the FIE.