China's Ministry of Finance (MOF) said Thursday it will exempt foreign companies from paying provisional withholding income tax on profits they re-invest in the country.
The news comes as the Chinese government is moving to attract foreign investors after a host of countries unveiled similar measures to lure foreign and domestic investment.
Foreign companies play an increasingly important role in boosting China's economy and promoting industrial and technological upgrades. The new policy will provide a better environment for foreign companies in the long-run, encourage them to continuously expand investment in China and boost win-win cooperation, the MOF said on its website.
The exemption is effective from January 1, 2017, meaning taxes paid this year will be refunded.
Foreign companies must meet a string of conditions to be eligible for the exemption, including direct investment into sectors encouraged by the Chinese government, and investment returns must be transferred directly to invested companies.
Countries are competing to attract foreign investment with a mixture of incentives including tax cuts and easier market access.
Spokesman of China's Ministry of Commerce (MOC) Gao Feng said earlier this month that China will remain a popular destination for foreign investment, due to economic stability, market potential and further opening up.
"Tax policy is an important factor in investment decisions, but it is not necessarily a decisive one," he said. "Economic stability, market potential and business environment of the target country are also important factors for investors to consider."
China implemented a revised foreign investment catalogue earlier this year, which relaxed restrictions on foreign investment in a number of industries.
Next year, a negative list approach to market entry, which states the sectors and businesses that are off limits to foreign investment, will be expanded nationwide.
Foreign direct investment (FDI) into the Chinese mainland rose 9.8 percent year on year to reach 803.62 billion yuan (around 122 billion U.S. dollars) in the first 11 months, faster than the 1.9-percent year-on-year increase registered in the first 10 months, according to data from the MOC.