Foreign companies in China’s development zones can benefit from a reduced 15 percent corporate income tax (CIT), as long as they can prove “substantial operations” in certain industries. Recently, Chinese authorities have published a series of guidelines explaining the requirements necessary to qualify for the preferential tax policy.
The Chinese government is seeking to boost business development and investment in key industries through this preferential rate, which will reduce the CIT from 25 percent to 15 percent and is available to companies operating in certain development zones.
The zones currently offering the reduced CIT are:
The Lingang New Area of the Shanghai Free Trade Zone in Shanghai (Lingang New Area);
The Fujian Pingtan Comprehensive Pilot Zone in Fuzhou, Fujian (Fujian Pingtan);
The Hengqin-Guangdong-Macao In-Depth Cooperation Zone in Zhuhai, Guangdong (Hengqin Cooperation Zone);
The Guangzhou Nansha Economic and Technological Development Zone in Guangzhou, Guangdong (Nansha Development Zone);
The Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone in Shenzhen, Guangdong (Qianhai Cooperation Zone);
The Hainan Free Trade Port in Hainan (Hainan FTP); and
China’s Western regions, which include Inner Mongolia, Guangxi, Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Qinghai, Ningxia, and Xinjiang (the “Western regions”).
Xiangxi Tujia and Miao Autonomous Prefecture in Hunan Province, Enshi Tujia and Miao Autonomous Prefecture in Hubei Province, Yanbian Korean Autonomous Prefecture in Jilin Province, and Ganzhou City in Jiangxi Province can offer the preferential CIT policy implemented in the Western regions.
Only companies operating in several encouraged industries, which vary depending on the local authorities, can benefit from the preferential rate.
In some cases, local jurisdictions expect enterprises to have a certain level of commitment to the area to enjoy the policy. They need to prove that they have “substantial operations” within the respective areas. Recently, more zones have specified what constitutes substantial operations, making it easier for businesses to access preferential CIT.
Each development zone decides which industries will be promoted, based on the local and national encouraged industry lists, which are updated periodically. Only companies that operate in these sectors can access the reduced CIT.
The requirements for the type of operations that must be carried out to benefit from the reduced CIT also vary depending on the region. These generally include deriving at least 60 percent of their main business income from one of the industries in the respective encouraged lists and having a significant structure in the area.
Here are eligible industries and requirements for companies based on each of the five development zones:
In Lingang New Area (Shanghai), eligible industries are: integrated circuits, artificial intelligence, biomedicine, and civil aviation, or a subsector thereof. Requirements include registration in the Lingang New Area since January 1, 2020, and for less than five years in total; must carry out substantial production or R&D activities in the Lingang; and the company’s main research and development or sales products include at least one key product (technology).
In Fujian Pingtan (Fuzhou), there are 146 eligible industries across six main categories: High-end technology, modern services, agriculture and aquaculture, ecology and environment, public infrastructure management, and tourism. Companies must derive at least 60 percent of their main business income from the encouraged industries catalog.
In Hengqin Cooperation Zone (Zhuhai), 150 sectors across high-tech, science and education R&D, traditional Chinese medicine, tourism, modern services, finance, and more, are encouraged. Firms must derive at least 60 percent of their main business income from industries in the catalog.
In Nansha Economic Zone (Guangzhou), 140 industries across eight categories are eligible, including: AI and integrated circuits, high-end equipment, environmental conservation technology, and life and health sciences, Information technology, advanced manufacturing, biopharmaceuticals and new energy and new materials.
In Qianhai Cooperation Zone (Shenzhen), there are 30 eligible industries across five categories: Modern logistics, information services, technology services, culture and creative industries, and business services. Firms must derive at least 60 percent of their main business income from industries in the catalog.
In Hainan FTP (Hainan), 143 industries across 14 categories are encouraged, including: agriculture, forestry, animal husbandry, and fishery, manufacturing, construction, wholesale and retail, transport, warehousing, and post, hospitality and catering, and finance.
In the Western regions, industries vary from region to region:
Chongqing (45 industries)
Sichuan (52 industries)
Guizhou (45 industries)
Yunnan (47 industries)
Tibet (41 industries)
Shaanxi (49 industries)
Gansu (42 industries)
Qinghai (32 industries)
Ningxia (39 industries)
Xinjiang (56 industries)
Inner Mongolia (41 industries)
Guangxi (46 industries)
Companies must derive at least 60 percent of their main business income from the encouraged industries catalog.
In addition, each of the areas has released its own sets of rules and definitions for what constitutes substantial operations. The definitions are similar but differ slightly in their wording and requirements.
The CIT policy is applicable to both parent companies in the development zone and branches within the zone that have been established by non-resident companies outside the area.
For a branch company to be eligible, it must have production or operational functions, and have operating income, employee remuneration, and total assets that match this production or operational function within the respective development zone.
Serious auditory work is usually necessary to determine if a company’s operations in each area are substantial to access preferential CIT. Firms should gather as much information as possible on their operations if they believe they may benefit from this policy.
In some cases, companies must submit a Substantive Operation Self-Assessment Commitment Form, to determine if their operations meet the eligibility requirements.
Local tax bureaus will regularly supervise companies already paying the preferential rate and ensure that they continue meeting the necessary requirements. This may include spot checks of the premises.
It is important that companies maintain records of their operating conditions to confirm that changes to staffing, premises, accounting procedures, production, or other factors do not affect their eligibility for the preferential CIT.
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