On 26 September 2018, to further encourage foreign investment and arguably respond to some changes in other home country rules designed to encourage pulling money back to places like the United States, the State Council resolved to increase the number of enterprises eligible to defer the dividend withholding tax on dividends reinvested in Chinese enterprises. To implement this resolution, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) released Notice 102 three days later. Notice 102 replaces Notice 88 and rescinds its requirement that the Chinese enterprise receiving the reinvestment operates in an "encouraged" industry in order for the withholding tax to be deferred on the reinvested dividends. Now, as long as the Chinese enterprise does not operate in a "prohibited" industry, the dividend withholding tax can be deferred. Notice 102 is effective as of 1 January 2018.
In this alert, we will first discuss the key changes introduced under Notice 102 and their major implications for multinational companies (MNCs). Then, we will outline how MNCs can obtain the dividend tax deferral treatment under Notice 102.