US tax cut effect: China exempts firms from taxes for reinvested profits

China said on Thursday it will temporarily exempt foreign firms from paying provisional income tax on profits they re-invest into the economy, in a bid to stop foreign firms shifting their operations out of the country.

The move will help "promote growth of foreign investment, improve quality of foreign investment and encourage overseas investors to continuously expand their investment in China," the finance ministry said on its website.

Analysts say a planned tax cut by US President Donald Trump, which could lead to a repatriation of earnings by US firms, poses a challenge China's bid to lure foreign investment.

The temporary exemption on provisional income tax is retroactive from Jan. 1 this year, which means firms that have paid taxes this year will be refunded.

But foreign firms must meet several conditions to be eligible for the exemption, the statement said. These include making direct investment into sectors encouraged by Chinese government while investments must be transferred directly to invested companies.

China's standard corporate tax rate is 25 percent although it gives firms more leeway to make profit deductions when they make charitable donations.

Some Chinese and foreign-funded companies have complained about rising business costs, including high tax burdens.