BEIJING — China said on Thursday that it would temporarily exempt foreign companies from paying tax on their earnings, a bid to keep American businesses from taking their profits out of China following Washington’s overhaul of the United States tax code.
There is, however, a catch: To be eligible for the exemption, foreign companies must invest those earnings in sectors encouraged by China’s government — including railways, mining, technology and agriculture — according to a statement from the Finance Ministry. The measure is retroactive from Jan. 1 this year, the ministry said.
The ministry said the move would “promote the growth of foreign investment, improve the quality of foreign investment and encourage overseas investors to continuously expand their investment in China,” It did not elaborate.
While the announcement did not explicitly refer to the revamped tax code in the United States, analysts say it is almost certain that the policy was in response to it. This month, China’s vice finance minister, Zhu Guangyao, pledged to “take proactive measures” in response to the overhaul, according to Xinhua, China’s state-run news agency.
The American tax overhaul, which became law this month, has been promoted by President Trump and other Republican leaders as a move to make the United States more competitive globally. In particular, the new corporate tax rate is sharply lower, moving the country from having among the highest corporate tax rates to among the lowest.
But ministers, officials and analysts in much of the rest of the world have said it could create an uneven playing field and set off a race among countries to cut corporate taxes.
European leaders have raised the specter of a trade battle and implied they may challenge the overhaul before the World Trade Organization.
Beijing has its own concerns. Many American and European companies, which have had to navigate tricky laws and been subject to forced technology transfers, have complained in recent years that China is becoming an increasingly difficult place to do business. And despite the country’s reputation as a low-cost manufacturing hub, it charges high levels of taxes.
China, which has been targeted by Mr. Trump for its trade practices, imposes a standard corporate rate of 25 percent. On top of that, companies have to make social security contributions that increase their tax burden beyond that in many other countries.
So the tax changes in the United States have fueled concerns in Beijing that American companies will move their operations outside China, or repatriate much of their earnings. Officials worry that a significant repatriation of foreign earnings could set off a broader capital flight, and weaken the country’s currency, the renminbi. A sharp fall in the renminbi could spark a vicious cycle with even more companies — and possibly individuals — looking to minimize losses by moving their money out of China.
Business lobbying groups said it was unlikely that the government’s latest measures would be significant enough to keep many American companies from repatriating profits.
Jake Parker, vice president for China operations at the U.S.-China Business Council, said some of his member companies had already said that they would seek to repatriate China earnings to the United States with the tax code change, and were considering doing so quickly to minimize the risk of being subject to capital controls.
“Some are concerned that China may impose foreign exchange controls if these repatriations mount up and lead to capital outflow pressures, like we saw early this year and last year,” said Mr. Parker.