China Tax Alert

ISSUE 11 I May 2014

Approval for the 15% preferential Corporate Income Tax rate for Qianhai, Hengqin and Pingtan new areas

Regulations discussed in this The MOF and SAT jointly released Circular 26 on 25 March 2014 which officially issue: states the policy for qualified companies in three new areas – Hengqin New Area (“Zhuhai Hengqin”) 1 , Qianhai Shenzhen-Hong Kong Modern Service • Notice of the Ministry of Industry Cooperation Zone (“Shenzhen Qianhai”)2 and Pingtan Comprehensive Finance (MOF) and the State Experimental Zone (“Fujian Pingtan”)3 – to enjoy a reduced Corporate Income Administration of Taxation Tax (CIT) rate of 15 percent. The publication of Circular 26 also finally clarifies (SAT) on the Preferential the uncertainties surrounding the CIT incentive policy. This is a welcome Corporate Income Tax Policy development for companies contemplating investing and settling in Zhuhai and Catalogues for Hengqin Hengqin, Shenzhen Qianhai and Fujian Pingtan, as the CIT policy is the major New Area of Guangdong attraction for these three new areas. Province, Pingtan Comprehensive Experimental Policy overview Area of Fujian Province and Qianhai Shenzhen-Hong Kong In principle, the State Council has agreed on the overall development plan for Modern Service Industry Zhuhai Hengqin, Shenzhen Qianhai and Fujian Pingtan in 2009, 2010 and 2011 Cooperation Zone, Caishui respectively and proposed the CIT incentive policy. The Investment Industries [2014] No. 26 (“Circular 26”), Catalogue/Permitted Industries Catalogue for these three areas have also been issued on 25 March 2014 introduced one after another whereas the specific policy pertaining to CIT was not finalised until the recent publication of Circular 26. The preferential policy • Notice on Issuing Interim that qualified companies in the three new areas are eligible to enjoy a reduced Measures for the CIT rate of 15 percent is now officially stated in Circular 26. Administration of Cross-Border Renminbi Loans in Qianhai, According to Circular 26, the criteria for enjoying the 15 percent preferential CIT Shen Ren Yin Fa [2012] No. rate are set out below: 173, issued on 27 December 2012 1）Applicable scope • Companies established in the specific zone • Notice on Issuing Rules for 2）Applicable criteria Implementing Interim • The companies’ main business falls within the ‘Preferential CIT Measures for the Catalogue’ in the specific zone. Administration of Cross-Border Renminbi Loans in Qianhai, • Revenue derived from the main business accounts for more than 70 Shen Ren Yin Fa [2013] No. 2, percent of the total revenue (which refers to the total revenue as issued on 5 January 2013 specified in Article 6 of the CIT Law, including income of monetary and non-monetary forms received from various sources).

1 Zhuhai Hengqin refers to the area of Hengqin Island that is blueprinted in the Overall Development Plan for Hengqin New Area issued in a reply by the State Council in August 2009. 2 Shenzhen Qianhai refers to the area of Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (“Qianhai Cooperation Zone”) that is blueprinted in the Overall Development Plan for Qianhai Cooperation Zone issued in a reply by the State Council in August 2010. 3 Fujian Pingtan refers to the area of Pingtan Comprehensive Experimental Area that is blueprinted in the Overall Development Plan for Pingtan Comprehensive Experimental Area issued in a reply by the State Council in November 2011 © 2014 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. © 2014 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3）Effective period • From 1 January 2014 to 31 December 2020

Key points

• The CIT preferential policy came into force in the first quarter of 2014 for a period of seven years.

• A company can enjoy both this CIT preferential policy and other CIT incentives concurrently, as well as opt for the most preferential CIT rate, e.g. a company established in the new areas and which is recognised as a key software company may be able to enjoy the most preferential CIT rate of 10 percent.

• If a company is eligible for 50 percent CIT reduction on a regular basis, CIT may be collected at half of the tax payable calculated at the statutory tax rate of 25 percent.

• Where tax authorities find it difficult to determine whether the company’s main business falls within the ‘Preferential CIT Catalogue’, they may ask the company to provide documentary proof issued by relevant competent administrative departments under provincial (including sub-provincial) governments or authorised competent administrative departments at the next lower level.

• The approved ‘Preferential CIT Catalogue’4 of these three new areas has relatively narrower scope compared to the existing ‘Investment Industries Catalogue/Permitted Industries Catalogue’5. The details are summarised below:

Area Shenzhen Zhuhai Hengqin Fujian Pingtan Qianhai ‘Preferential CIT Catalogue’4 21 industry 72 industry sectors 127 industry Overview sectors under under five sectors under five four categories categories categories 1. Modern 1. New and high 1. High technology logistics technology industry (74) services (4) industry (37) 2. Consumer 2. Information 2. Medicine and services (18) services (8) health (13) 3. Agricultural and 3. Technology 3. Science marine industry services (4) education/ (10) 4. Cultural research and 4. Ecological and innovation (5) development environmental (R&D) (10) protection (9) 4. Cultural 5. Infrastructure innovation (5) management (16) 5. Commercial services (7) ‘Investment Industries Catalogue/Permitted Industries Catalogue’5 Overview 112 industry 200 industry 350 industry sectors under sectors under eight sectors under five six categories categories categories 1. Financial 1. Tourism and 1. High technology services (23) leisure (10) industry (105) 2. Modern 2. Logistics/ 2. Consumer logistics commercial/ services (108) services (18) business services 3. Agricultural and 3. Information (36) marine industry services (16) 3. Financial services (20)

4‘Preferential CIT Catalogue’ refers to Preferential CIT Catalogues for Shenzhen Qianhai, Zhuhai Hengqin and Fujian Pingtan. 5‘Investment Industries Catalogue/Permitted Industries Catalogue’ refers to the Permitted Industry Catalogue for Shenzhen Qianhai and Investment Industries Catalogue for both Zhuhai Hengqin and Fujian Pingtan. © 2014 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. © 2014 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4. Technology (34) 4. Tourism (15) services (7) 4. Cultural 5. Social 5. Professional innovation (24) programme (36) services (39) 5. Medicine and 6. Ecological and 6. Public health (27) environmental services (9) 6. Science protection (18) education and 7. Infrastructure R&D (23) management (48) 7. New and high technology industry (34) 8. Others (12)

KPMG’s observations

The issuance of Circular 26 further implements the preferential policy and is a welcome development for companies intending to settle in any of the three new areas. We have noticed that the ‘Preferential CIT Catalogue’ for Zhuhai Hengqin and Fujian Pingtan mainly focuses on industries such as new and high technology, medicine and health, ecological and environmental protection, etc. while Shenzhen Qianhai focuses on modern logistics, information and technology services, as well as cultural innovation. However, all of the ‘Preferential CIT Catalogues’ for the three areas have a narrower scope than expected. In particular, financial services, which ought to be the primary industrial sector for Shenzhen Qianhai and Zhuhai Hengqin, have not been included in the finalised ‘Preferential CIT Catalogues’. As a result, these three areas will likely be less attractive to investors in certain industries. Based on our understanding, Qianhai Administration Bureau is currently considering providing supportive policies in other forms to the financial companies settled in or that will settle in Shenzhen Qianhai.

While enjoying the preferential CIT treatment, some issues may still need to be further clarified or noted, including the following:

• The preferential policies in Circular 26 have merely provided general descriptions to the industrial sectors. The investors and administrative authorities may therefore have different interpretations of the contents in the policies, which could lead to difficulties in implementing preferential policies. As such, we have made enquiries to Qianhai Administration Bureau in this respect and understand that at this stage they are actively bringing together different departments to formulate detailed implementation rules. We expect that the introduction of such implementation rules will effectively solve this problem.

• Apart from the two criteria mentioned above, Circular 26 has not yet set out any other additional conditions for different industries, and tax planning opportunities may be available for certain companies. For example, companies engaged in the high technology industry but which fail to meet the requirements for new and high technology enterprises may consider establishing an entity in these three new areas.

• As one of the criteria above, and in accordance with the provision in the CIT Law, the total revenue should include the income derived from the sale of goods, provision of services, transfer of property, dividends/bonuses/other equity investment, interest, rental, royalties, donations and other sources. A company may need to pay particular attention to any significant amount of non-recurring income as it may result in the main business income accounting for less than 70 percent of the total revenue.

• Where a company in one of the three new areas is used as the platform for outbound investment, the question of whether the 15 percent preferential CIT rate will apply to the foreign-sourced income for the purpose of calculating foreign tax credit has not been clarified in Circular 26. Assuming the answer is ‘yes’, it is believed that such policy will attract qualified companies to set up entities in these new areas as their overseas investment platform.

© 2014 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. © 2014 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

• Policies relating to renminbi cross-border loans were released prior to the issuance of Circular 26. Apart from the tax incentives, companies established in Qianhai may also take advantage of cross-border loans to finance business development in Qianhai at a lower cost.

In summary, the promulgation of Circular 26 provides the fundamental policy for companies established in Shenzhen Qianhai, Zhuhai Hengqin and Fujian Pingtan to enjoy the preferential CIT rate of 15 percent. As one of the first professional services organisations to enter into a cooperation agreement with Qianhai Administration Bureau, KPMG is pleased to provide assistance to those companies intending to invest in these three new areas. We will continue to closely monitor the development of the related policies so that we can provide the latest information and share our observations and opinions.

Khoonming Ho Northern China Zichong Xu Maria Mei Kate Lai Partner in Charge, Tax David Ling Joseph Tam Tel. +86 (21) 2212 3404 Tel. +86 (592) 2150 807 Tel. +852 2978 8942 China and Hong Kong SAR Partner in Charge, Tax Tel. +86 (10) 8508 7605 [email protected] [email protected] [email protected] Tel. +86 (10) 8508 7082 Northern China [email protected]

[email protected] Tel. +86 (10) 8508 7083 William Zhang Michelle Sun Anni Wang Alex Lau [email protected] Tel. +86 (21) 2212 3415 Tel. +86 (20) 3813 8615 Tel. +86 (10) 8508 7518 Tel. +852 2143 8597 Beijing/Shenyang [email protected] [email protected] Vaughn Barber [email protected] [email protected] David Ling Tel. +86 (10) 8508 7071 Partner in Charge, Tax Sheila Zhang Michelle Zhou Lixin Zeng [email protected] Benjamin Pong Northern China Tel. +86 (10) 8508 7507 Tel. +86 (21) 2212 3458 Tel. +86 (20) 3813 8812 [email protected] [email protected] [email protected] Tel. +852 2143 8525 Tel. +86 (10) 8508 7083 Roger Di [email protected] [email protected] Tel. +86 (10) 8508 7512 Tiansheng Zhang Cheng Dong Hong Kong [email protected] Tel. +86 (10) 8508 7526 Tel. +86 (21) 2212 3410 Adam Zhong Qingdao Ayesha M. Lau [email protected] [email protected] Tel. +852 2685 7559 Vincent Pang Partner in Charge, Tax John Gu [email protected] Tel. +86 (532) 8907 1728 Hong Kong SAR Tel. +86 (10) 8508 7095 Central China David Huang [email protected] Tel. +852 2826 7165 [email protected] Lewis Lu Tel. +86 (21) 2212 3605 [email protected] Partner in Charge, Tax [email protected] Shanghai/Nanjing Kevin Lee Central China Dylan Jeng Chris Abbiss Lewis Lu Tel. +86 (10) 8508 7536 Tel. +86 (21) 2212 3421 Tel. +86 (21) 2212 3080 Tel. +852 2826 7226 Partner in Charge, Tax [email protected] [email protected] [email protected] [email protected] Central China Tel. +86 (21) 2212 3421 Paul Ma Anthony Chau Amy Rao Darren Bowdern [email protected] Tel. +86 (10) 8508 7076 Tel. +86 (21) 2212 3206 Tel. +86 (21) 2212 3208 Tel. +852 2826 7166

[email protected] +86 (28) 8673 3916 [email protected] [email protected] Chengdu [email protected] Barbara Forrest Anthony Chau Vincent Pang Henry Wong Cheng Chi Tel. +86 (28) 8673 3916 Tel. +86 (10) 8508 7516 Tel. +86 (21) 2212 3380 Tel. +852 2978 8941 [email protected] +86 (532) 8907 1728 Tel. +86 (21) 2212 3433 [email protected] [email protected] [email protected] [email protected] Daniel Hui Guangzhou Southern China Michael Wong Chris Ho Tel. +852 2685 7815 Lilly Li Eileen Sun Tel. +86 (10) 8508 7085 Tel. +86 (21) 2212 3406 [email protected] Tel. +86 (20) 3813 8999 Partner in Charge, Tax [email protected] [email protected] [email protected] Southern China Charles Kinsley Tel. +86 (755) 2547 1188 Jessica Xie Lily Kang Tel. +852 2826 8070 Fuzhou/Xiamen [email protected] Tel. +86 (10) 8508 7540 Tel. +86 (21) 2212 3359 [email protected] Maria Mei [email protected] [email protected] Tel. +86 (592) 2150 807 Vivian Chen John Kondos [email protected] Irene Yan Ho Yin Leung Tel. +86 (755) 2547 1198 Tel. +852 2685 7457 Tel. +86 (10) 8508 7508 Tel. +86 (21) 2212 3358 [email protected] [email protected] [email protected] Shenzhen [email protected] Alice Leung Eileen Sun Sam Fan Leonard Zhang Sunny Leung Tel. +852 2143 8711 Partner in Charge, Tax Tel. +86 (755) 2547 1071 Tel. +86 (10) 8508 7511 Tel. +86 (21) 2212 3488 [email protected] Southern China [email protected] [email protected] Tel. +86 (755) 2547 1188 [email protected] Curtis Ng

[email protected] Tracy Zhang Angie Ho Tel. +852 2143 8709 Christopher Mak Tel. +86 (10) 8508 7509 Tel. +86 (755) 2547 1276 [email protected] Tel. +86 (21) 2212 3409 Hong Kong [email protected] [email protected] [email protected] Kari Pahlman Karmen Yeung Tel. +852 2143 8777 Tel. +852 2143 8753 Abe Zhao Jean Jin Li Henry Ngai [email protected] [email protected] Tel. +86 (10) 8508 7096 Tel. +86 (755) 2547 1128 Tel. +86 (21) 2212 3411 [email protected] Tel. +86 (592) 2150 888 [email protected] John Timpany [email protected] Tel. +852 2143 8790 Eric Zhou Brett Norwood [email protected] Tel. +86 (10) 8508 7610 Tel. +86 (21) 2212 3505 Lilly Li

[email protected] [email protected] Tel. +86 (20) 3813 8999 Wade Wagatsuma [email protected] David Chamberlain Yasuhiko Otani Tel. +852 2685 7806 Tel. +86 (10) 8508 7056 Tel. +86 (21) 2212 3360 Kelly Liao [email protected] [email protected] [email protected] Tel. +86 (20) 3813 8668 Lachlan Wolfers Tony Feng [email protected] John Wang Tel. +852 2685 7791 Tel. +86 (10) 8508 7531 Tel. +86 (21) 2212 3438 Bin Yang [email protected] [email protected] [email protected] Tel. +86 (20) 3813 8605 [email protected] Li Li Christopher Xing Jennifer Weng Tel. +86 (10) 8508 7537 Tel. +852 2978 8965 Tel. +86 (21) 2212 3431 Penny Chen [email protected] [email protected] [email protected] Tel. +86 (755) 2547 1072 [email protected] Alan O’Connor Grace Xie Karmen Yeung Tel. +86 (10) 8508 7521 Tel. +86 (21) 2212 3422 Grace Luo Tel. +852 2143 8753 [email protected] [email protected] Tel. +86 (20) 3813 8609 [email protected] [email protected] Bruce Xu Rebecca Chin Tel. +86 (21) 2212 3396 Tel. +852 2978 8987 kpmg.com/cn [email protected] [email protected]

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