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Tax Deferral or Double Taxation of Chinese Outbound Investments? CFC & FTC Rules

As the economy in China continues to bloom, many Chinese enterprises have been trying to open the gate to investments in foreign countries as they expand their businesses worldwide. To cope with the growing number of outbound investments, the Chinese tax authorities have introduced certain new measures, including controlled foreign corporation (CFC) rules, to discourage the shifting of income to foreign jurisdictions that do not levy taxes locally or that impose tax at favourable rates. At the same time, the indirect foreign tax credit (FTC) rules, which were established based on the direct FTC rules in the previous law, are designed to minimise double taxation on foreign income attributable to Chinese enterprises under the new Enterprise Income Tax (EIT) Law system effective from 1 January 2008. This article explains the CFC and FTC rules in China with illustrative examples, followed by a discussion of relevant observations.