To implement the "Announcement on the Tax Credit Policy for Direct Investment by Foreign Investors using Distributed Profits", the State Taxation Administration has further issued supporting announcement and interpretation. The main contents are as follows:

• Where a foreign investor uses the distributed profits to make up the registered capital it has already subscribed for in a domestic resident enterprise, thereby increasing the paid-in capital or capital reserve, such a situation shall be classified as "increasing or converting into the paid-in capital or capital reserve of a domestic resident enterprise in China".

• After a foreign investor enjoys the tax credit policy for reinvestment, if it reduces its capital, withdraws its investment from the invested enterprise, or transfers the equity of the invested enterprise, the time when the calculation of holding the recovered part of the reinvestment ceases shall be determined as the earlier of the month when the invested enterprise completes the equity change or deregistration procedures, or the month when the consideration for the above-mentioned assets or equity is obtained.
• When determining the amount of tax credit, the foreign investor may elect to calculate it at 10% of the reinvested amount or at the dividend tax rate stipulated in the applicable tax treaty. When withdrawing the investment and paying the deferred tax after holding the investment for 60 months, the same rate as that used in calculating the tax credit limit shall be applied. If a foreign investor initially chooses to apply the dividend tax rate provided for in the tax treaty and calculates and pays the tax according to that rate when recovering the investment, but is later deemed by the tax authorities as not meeting the conditions for enjoying the tax treaty and thus needs to pay additional taxes, the foreign investor may adjust and increase its tax credit limit accordingly.
• When a foreign investor makes reinvestment in foreign currency, the amount shall be converted into RMB at the exchange rate on the actual payment date to calculate both the deferred enterprise income tax amount on the reinvested dividend income and the corresponding tax credit limit.
• The order for a foreign investor to withdraw its direct investment is: first, dispose of the investment that has enjoyed the tax credit policy; second, dispose of the investment that meets the conditions but has not actually enjoyed the tax credit policy; finally, dispose of the investment that does not meet the conditions for the tax credit policy.
• If a foreign investor makes multiple reinvestments in the same resident enterprise and enjoys the tax credit policy, when recovering part of the investment, the amount of the recovered investment that has enjoyed the tax credit policy shall be determined in the order of the reinvestment time.
• If an overseas investor who does not meet the requirements improperly enjoys the tax credit policy and thereby underpaying tax, overdue payment shall be charged from the date the credit was actually applied (i.e., the day the tax was offset).
• The creditable tax payable by a foreign investor shall meet the following conditions simultaneously:

1) It is the enterprise income tax payable on the income obtained from the same profit-distributing enterprise;

2) The type of income is dividend, interest, royalty, etc.;

3) The time of obtaining the income is after the reinvestment time.