China 2025–2028 Tax Credit Policy for Foreign Investors’ Reinvestment of Profits

On 27 June 2025, China’s Ministry of Finance, State Taxation Administration, and Ministry of Commerce jointly issued Announcement [2025] No. 2, regarding a 10% enterprise income tax credit that can be claimed by eligible foreign investors who reinvest profits (e.g., dividends, interest, royalties or other kind of income) in specified sectors. The policy applies from 1 January 2025 to 31 December 2028, with retroactive eligibility for qualifying investments made after 1 January 2025.

To qualify, reinvestments must be in industries listed in the Encouraged Industries Catalogue and take the form of capital increases, new enterprises, or equity acquisitions from unrelated, non-listed parties. Among those Encouraged Industries are agriculture, mining, manufacturing, construction, transport, IT, finance, R&D and others. The holding period of investment must be at least five years, and investments must be paid directly from the distributing enterprise to the investee. In addition, early withdrawal triggers tax repayment and proportional claw back of tax credits, and compliance is managed through the Ministry of Commerce’s Unified Platform.

China’s new VAT Law takes effect in 2026

On 1 January 2026, China’s new VAT Law will come into effect, replacing the Provisional VAT Regulations that had governed the system since 1993. This reform brings major structural changes to China’s most important indirect tax.

The law clarifies the scope of taxable transactions by consolidating goods, services, intangibles, and real estate into a unified category. The previous distinction for “labor services” has been removed and is now treated as part of “services.”

Provisions on deemed sales have been updated. Self-produced or commissioned goods provided for non-business use, such as employee benefits, will now be taxable. Free intra-group services between businesses will no longer be subject to VAT.

Rules on input VAT deductions have also changed. Loan service VAT may become deductible; however, this depends on implementing rules to be issued by the State Council.

For small-scale taxpayers, a simplified structure introduces a unified 3% rate, replacing the previous 3% and 5% tiers. Some exceptions may apply, for example in real estate leasing.

The law also introduces anti-avoidance rules allowing tax authorities to adjust valuations in non-monetary or related-party transactions. In addition, taxpayers may either carry forward excess input VAT or apply for a refund, improving liquidity.

The Carbon Border Adjustment Mechanism (CBAM), established with the EU Regulation No. 2023/956 of 10 May 2023, is an environment protection policy aimed to put a price on the emissions generated in the production of specific goods imported into the EU. Currently in its transitional period, 1 October 2023 – 31 December 2025, the definitive regime will start from 2026.

At the moment the CBAM applies to cement, iron and steel, aluminium, fertilisers, electricity and hydrogen: when importing from non-EU countries, importers have to report related emissions, considering both the direct emissions from manufacturing, and the indirect emissions from the generation of used electricity.

On last 1 January 2025, the CBAM-related compliance entered a new phase, with the official launch of the CBAM Registry’s new section allowing suppliers outside the EU to share goods’ emissions data with the EU importers.

After the full implementation, importers will need to purchase CBAM certificates corresponding to the emissions of imported goods, with deductions allowed for costs incurred in the country of origin. A system of penalties for non-compliance is already in place.

The CBAM will surely impact on companies that import from non-EU countries such as China, thus making it essential to have up-to-date information to proceed with the related compliance activities.