On Sep 29, 2018, Ministry of Finance, State Administration of Taxation, National Development and Reform Commission, and Ministry of Commerce of the People’s Republic of China co-distributed the Circular on Expanding the Applicable Scope of the Policy of Temporarily Not Levying the Withholding Tax on Distributed Profits Used by Overseas Investors for Direct Investment (the "Circular"), retrospectively effective from January 1, 2018.

According to the Circular, the policy under which profits received by an overseas investor from a resident enterprise within the territory of China will temporarily be exempt from the withholding tax, if such profits are used for direct investment in China, will be applicable to a larger extent, covering not only the encouraged category of foreign-invested projects but also all projects and fields from which foreign investments are not banned. Further, the Circular clearly states that, an overseas investor must satisfy three requirements to be eligible for the privilege of temporary exemption from withholding tax. One of the three requirements is that "direct investments made by the overseas investor with distributed profits cover equity investments made by this overseas investor with profits it receives, including the capital increase for a domestic resident enterprise, the incorporation of a new resident enterprise in China and the acquisition of equities of a domestic resident enterprise, but excluding the increase in, the conversion into, and the acquisition of, a listed company's shares".  An overseas investor that meets the given requirements shall file for the above exemption with the supporting documents, which shall be subject to review of the competent Tax Administration. Furthermore, if an overseas investor eligible for exemption has paid the withholding tax, such investor shall be allowed to file for tax return within three years from the payment date of such withholding tax.