New Tax Credit Rule Promotes Outbound Investment

| BY

Hu Zhiqiang, Dai Guanchun

PRC outbound investment has received another boost via a new tax credit regulation that simplifies procedures and provides greater options to Chinese companies keen on multi-jurisdictional forays. It would be wise for these corporates to review and restructure their tax credit strategies to capitalize on the government's commitment to expanding outward.

the Circular on Issues Relevant to Improving the Tax Credit Policy for Enterprise Offshoresourced Income 1 . THE OFFSHORE-PAID TAX MAY OFFSET THE LIMITATION OF FOREIGN TAX CREDITS  COMBINING ALL OF THE JURISDICTIONS CONCERNED (COMPREHENSIVE TAX CREDIT METHOD)

1.1 The old rule may cause a shortage of tax credits

Before the issuance of the new rule, the tax law used to provide that the offshore-paid tax may offset the limitation of foreign tax credits on a jurisdiction-by-jurisdiction basis (Jurisdictionseparate Tax Credit Method). The new rule will not make a big difference if a Chinese company just invests in one jurisdiction. But, it does not represent the outbound investment mainstream and a growing number of Chinese companies have strategically expanded their businesses to more than one jurisdiction. On the one hand, it is very natural for a Chinese company to consider entering the Netherlands if it has been operating business in Belgium already; on the other hand, when a Chinese company chooses to acquire a multinational company, the Chinese company will follow the target company to enter the jurisdictions in which the target company has already been operating.

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