China is to temporarily waive income taxes for foreign companies on profits they reinvest in the country as Beijing battles to retain foreign firms and investment.
The Chinese Ministry of Finance on Thursday announced the new tax policy, which would apply retroactively from next month so that businesses would be able to take advantage of the exemption for this year’s taxes.
The new incentives for foreign businesses to keep their earnings in China follow last week’s corporate tax overhaul in the US.
TAX RATES
The US reform is to lower the tax rate for most corporations to 21 percent. Businesses in China pay 25 percent.
The temporary exemption “will create a better investment environment for foreign investors and encourage foreign investors to sustain their investments in China,” a spokesman for the Chinese Ministry of Commerce said.
The policy announcement also comes as China has struggled with capital flight and tightened capital controls this year to stem the outflow of money.
However, foreign companies have long complained of the onerous bureaucracy they must navigate, barriers to market access and policies that favor local firms.
The new tax incentives aim to make China more attractive, but come with a slew of restrictions.
To be eligible, the profits must be invested in industries and activities where the Chinese government encourages foreign investment: manufacturing, services, research and development.
Locations in the west of the country are also prioritized for development.
Companies have three years to apply for the exemptions after paying tax.
UPWARD TICK
Beijing has been eager to retain foreign investment after its decline last year, but ministry statistics show that foreign direct investment ticked upward in the first 11 months of this year, when compared with last year.
China could not ignore the spillover effects from the change in tax policy of the world’s largest economy, Vice Minister of Finance Zhu Guangyao (朱光耀) told a Phoenix TV finance forum earlier this month, adding that China must carry out policy trials.
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