News Flash Tax and Business Advisory

The Central Government finally nailed down the CIT Incentive Catalogues for , Qianhai and Pingtan

April 2014 Issue 6

In brief

According to the policies previously approved by the State Council in respect of the Hengqin New Area (Hengqin), Qianhai -Hong Kong Modern Services Industry Cooperation Zone (Qianhai) and Pingtan Comprehensive Experimental Zone (Pingtan) (hereinafter referred to as ‘the three zones’), qualified enterprises established in the three zones may enjoy a reduced corporate income tax (CIT) rate of 15%. The Catalogues for Industries Permitted (hereinafter referred to as ‘the Industry Catalogues’)in each of the three zones have been released separately in 2013. The market has been eagerly waiting for the respective Catalogue for Encouraged Industries eligible for CIT Preferential Treatment (hereinafter referred to as ‘the CIT Incentive Catalogues’).

The Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly released Caishui [2014] No.26 (Circular 26) on 27 March 2014 which clarifies the policies for the aforementioned CIT incentive and the respective CIT Incentive Catalogue1 for the three zones. Investors should understand the scope of the encouraged industries eligible for CIT preferential treatment under the respective CIT Incentive Catalogue and study whether it is time to expand their business into these zones after taking into account the existing business operations and business needs.

In detail and out of the zones, only  72 industry sectors under income generated by the five broad categories for Criteria for enjoying the establishments in the zones can Hengqin. CIT preferential treatment enjoy the 15% CIT rate. In and the applicable scope assessing the eligibility to the  21 industry sectors under CIT incentive, only four broad categories for Based on Circular 26, an establishments in the zones Qianhai. enterprise established in the should be taken into three zones has to satisfy the  127 industry sectors under consideration in determining following criteria in order to five broad categories for whether the above-mentioned enjoy the 15% CIT rate: Pingtan. criteria are satisfied.  The main business of the Establishments outside the (Please refer to the table in the enterprise falls within the zones should not be considered. Appendix for further details.) This treatment is similar to the CIT Incentive Catalogue of Modern logistics, commercial CIT preferential policies for that specific zone. services and cultural enterprises in China’swestern innovation  More than 70% of its total region2. Investors interested in revenue is derived from its investing in these zones should The CIT Incentive Catalogues main business. carefully plan their for the three zones have all If enterprises have establishment structure and included certain industry establishments located both in business arrangements in and sectors under modern logistics, outside the zones. commercial services and cultural innovation. In Overview of the CIT particular, due to the Incentive Catalogues geographical advantage3, the In the newly released CIT CIT Incentive Catalogues for Incentive Catalogues, there are: Hengqin and Qianhai have

www.pwccn.com News Flash — China Tax and Business Advisory also included supply chain the R&D and production of interested in investing in these management or consultation and pharmaceutical products, etc. three zones. It is expected that the logistics management, etc. local governments of the respective Currently, these sectors are unlikely  Qianhai – Most of the zones will release detailed to enjoy the 15% reduced CIT rate encouraged sectors under measures to implement Circular 26, in other areas in China. It would be Qianhai’sCIT Incentive for instance, how to determine helpful to promote the development Catalogue are service-related whether the main business of an of these sectors if the local due to its space limitation. enterprise falls into the scope of the governments of Hengqin and  Pingtan – Pingtan is an island respective CIT Incentive Qianhai could give more close to Taiwan, its CIT Catalogues, the assessment/record- clarification on how an enterprise Incentive Catalogue includes filing procedure as well as the should structure its business scope many agriculture and marine documentation requirements for and business model in order to related sectors. the relevant CIT incentive. enjoy the 15% reduced CIT rate. It is worth noting that although the For investors considering making Incentives for new/high financial services category is one of an investment or expanding their technology sectors and the key focus areas for both business into the three zones, they technological services Hengqin and Qianhai and has been should initiate dialogues with the local in-charge authorities in order Under China’sCIT Law, enterprises included in their respective to clarify whether the investment engaged in projects that fall within Industry Catalogue, it is not in the projects and business models would the list of ‘New/High Technology respective CIT Incentive be able to enjoy the relevant CIT Sectors Specifically Supported by Catalogues. We understand that incentive. the State’4 (New/High Technology both local authorities may further Catalogue) and assessed as study the possibility of providing The individual income tax rebate New/High Technology Enterprises other incentive policies for sectors policies are already being (NHTE) are also eligible for the 15% that are not covered by the CIT implemented in the three zones. reduced CIT rate. It is interesting to Incentive Catalogues. Investors Enterprises should, after taking note that there is an overlap of should pay close attention to future into account the existing operation certain industry sectors between policy developments in this area. model, business characteristics and the New/High Technology Overlap of CIT incentives needs, formulate optimised Catalogue and the CIT Incentive investment and operational Catalogues of the three zones. Enterprises may concurrently enjoy structure, staff mobility and tax the 15% reduced CIT rate under strategies in order to grasp the The criteria for the CIT incentive Circular 26 and other incentives business opportunities in the three under Circular 26 have not made under the CIT Law (e.g. CIT zones and properly leverage on the any reference to the NHTE reduction and exemption, super 5 various incentive policies. qualifying criteria . It appears that deductions, etc.). Where the ‘other it may be easier for enterprises in incentives’include reduced CIT In the beginning of the year, the the three zones that are engaged in rate, the enterprise may choose to Minister of Finance indicated in a new/high technology sectors to apply the most preferential CIT speech that the Government will enjoy the 15% CIT rate. Enterprises rate. In addition, where an clean up all local/un-authorised tax should closely monitor the enterprise is also eligible for the incentives. The 15% reduced CIT development in this area, e.g. 50% CIT rate reduction, its effective policy for the three zones may likely whether the local authorities in the CIT rate should be computed based be the 'final' batch of nationally three zones will impose on the statutory CIT rate of 25% approved geographical CIT supplementary criteria on the (i.e. an effective CIT rate of 12.5% = incentives. Such preferential assessment of new/high technology 50% of 25%). This is consistent policies for Hengqin, Qianhai and industry sectors when with the treatment for most of the Pingtan are expected to further implementing Circular 26 (e.g. other similar circumstances where enhance Mainland’seconomic ownership of intellectual property there is an overlap of CIT incentives cooperation and development with (IP) rights, research and on a tax holiday and reduced CIT Macao, Hong Kong and Taiwan. development (R&D) expenditure, rate. Investors are encouraged to grasp education of employees, etc.) or the opportunities based on their request the relevant government Effective period own business strategies and needs. bodies in charge of science and technology to verify the quality of The valid period for the above CIT the relevant ‘new/high technology’. incentive for Hengqin, Qianhai and Pingtan is seven years, i.e., from 1 Endnote: Local features January 2014 to 31 December 2020. This is consistent with the 1. Please refer to the Fujian Local There are special industry sectors period of preferential policies for Tax Bureau’s official website for in the respective CIT Incentive the three zones that was previously the content of Circular 26 and Catalogue for the three zones, for Pingtan’s CIT Incentive Catalogue. approved by the State Council. instance: The CIT Incentive Catalogues for Hengqin and Qianhai are yet to be  Hengqin – Hengqin’sCIT The takeaway released to the public. Incentive Catalogue includes The official release of the three CIT http://www.fj-l- many high-technology R&D Incentive Catalogues is welcoming tax.gov.cn/ar/2014040114000012 and manufacturing sectors and news to investors who are .htm 2 PwC News Flash — China Tax and Business Advisory

4. Please refer to the Notice Jointly 2. Please refer to the SAT Public Issued by the Ministry of Science Notice [2012] No.12 regarding the and Technology, MOF and SAT CIT incentives for enterprises in releasing the Administrative China’s western region. Measures for the Assessment of NHTEs (Guokefahuo [2008] 3. Qianhai and Hengqin are located No.172). in the economic centre of the and close to ports, 5. According to Goukefahuo [2008] airports and highways with No.72, the criteria for NHTE seamless connection to Hong Kong include the minimum number of and/or Macao in the near future. personnel with university degrees, minimum percentage of R&D expenditure and the ownership of IP right, etc., in addition to the minimum proportion of income from new/high technology products over total income.

Appendix:

The CIT Incentive Catalogues for the three zones Area Qianhai Hengqin Pingtan Overview 21 sectors 72 sectors 127 sectors (4 categories) (5 categories) (5 categories) Technology services (4) New/high technology (37) High-technology (74) Modern logistics Commercial services (7) Services (18) services (4) Number of Cultural innovation (5) Cultural innovation (5) Agricultural and marine sectors sectors (10) under each Information services (8) Education and R&D (10) Ecological and environmental category protection (9) Pharmaceutical industry and Public facility management (16) healthcare (13)

3 PwC News Flash — China Tax and Business Advisory

Let’s talk

For a deeper discussion of how this issue might affect your business, please contact the following PwC China South Tax Partners:

Charles Lee Rebecca Wong Catherine Tsang +86 (755) 8261 8899 +86 (755) 8261 8267 + 852 2289 5638 [email protected] [email protected] [email protected]

In the context of this News Flash, China, Mainland China or the PRC refers to the People’s Republic of China but excludes Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region. The information contained in this publication is for general guidance on matters of interest only and is not meant to be comprehensive. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PwC’s client service team or your other tax advisers. The materials contained in this publication were assembled on 8 April 2014 and were based on the law enforceable and information available at that time. This China Tax and Business News Flash is issued by the PwC’s National Tax Policy Services in China and Hong Kong, which comprises of a team of experienced professionals dedicated to monitoring, studying and analysing the existing and evolving policies in taxation and other business regulations in China, Hong Kong, Singapore and Taiwan. They support the PwC’s partners and staff in their provision of quality professional services to businesses and maintain thought-leadership by sharing knowledge with the relevant tax and other regulatory authorities, academies, business communities, professionals and other interested parties. For more information, please contact: Matthew Mui +86 (10) 6533 3028 [email protected] Please visit PwC’s websites at www.pwccn.com (China Home) or www.pwchk.com (Hong Kong Home) for practical insights and professional solutions to current and emerging business issues.

© 2014 PricewaterhouseCoopers Consultants (Shenzhen) Ltd. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Consultants (Shenzhen) Ltd. which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.