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China Trade Development: Fifteen Percent (15%) Corporate Income Tax Rate, New Incentive to Invest in the South Eastern Region of China

China Business Alert | October 14, 2014
By: YanLing (Winnie) Wang

As part of its continuing efforts to attract foreign investment and to encourage technological development, the People’s Republic of China (PRC or China) in recent years has established a number of special economic zones and promulgated various preferential policies covering tax, foreign exchange, and the foreign investments in these zones. In addition to launching the Shanghai Pilot Free Trade Zone in September 2013 to provide a testing platform for China’s market reforms, the Chinese government has issued multiple new tax policies in 2014 to provide preferential corporate income tax treatment for companies, which fall within certain encouraged industries, established in the South Eastern region of China.

On March 25, 2014, the Ministry of Finance and the State Administration of Taxation jointly issued Caishui (2014) No. 26 (Circular 26)[i] regarding preferential corporate income tax rate (CIT) policies and investment catalogues for the Guangdong Hengquin New Area (Hengqin), the Fujian Pingtan Comprehensive Pilot Zone (Pingtan) and the Qianhai Shengzhen-Hong Kong Modern Service Industry Cooperation Zone (Qianhai, with Hengqin and Pingtan, collectively referred to as the “Three Regions”). Pursuant to Circular 26, a reduced CIT rate of 15% will be offered to specified industries established in the Three Regions.  This preferential rate is a significant reduction from the standard CIT rate of 25%. The policies promulgated in Circular 26 are effective for 7 years from January 1, 2014 to December 31, 2020. 

According to Circular 26, the criteria for an enterprise to qualify for the 15% CIT rate are: (1) the enterprise’s main business is listed in the “Preferential CIT Catalogues” for the Three Regions; and (2) the revenue derived from the main business accounts for more than 70% of the total revenue of the enterprise.  It shall be noted that only revenues generated from such enterprise’s headquarters or branches within the Three Regions can be counted to evaluate whether an enterprise qualifies for the preferential tax incentives provided by the Circular 26.  To determine whether a company’s main business falls within the “Preferential CIT Catalogues”, the local tax authorities may ask the company to provide documentary proof issued by relevant competent administrative departments under provincial or local governments.

The above mentioned CIT incentive catalogues for the Three Regions include 72 industry sectors under five categories for Hengqin, 127 industry sectors under five categories for Pingtan and 21 industry sectors under  four categories for Qianhai, including the categories listed in the following table:

Region

Hengqin

Pingtan

Qianhai

Industry Categories

High and New Technology Industry

High Technology Industry

Modern Logistics Services Industry

 

Pharmaceutical and Healthcare Industry

Commercial Services Sector

Information Services Industry

 

Science Education and Research and Development  Sectors

Agricultural and Marine Industry

Technology Services Industry

 

Cultural Innovation Sector

Ecological and Environmental Protection Industry

Cultural Innovation Sector

 

Commercial Services Sector

Public Facility Management Industry

 


Furthermore, if an enterprise is eligible for other preferential CIT rates, it has the option to select the most preferential CIT rate. For example, if an enterprise is eligible for a 15% CIT rate and is subject to statutory CIT with a 50% reduction, its CIT payable should be calculated according to the statutory CIT rate of 25% with a 50% reduction, which means it can enjoy an effective CIT rate at as low as 12.5%.

U.S. companies in industries that may qualify for the preferential 15% CIR rate should evaluate whether to invest in the encouraged industries in the Three Regions in China.  With strategic alliances with law firms in Shanghai and Tianjin, China, White and Williams LLP has an experienced team of attorneys who counsel U.S. companies in developing their strategies for investing in China. 

For additional information regarding foreign investment in China or our China Business Practice Group, please contact Gary Biehn (215.864.7007 | biehng@whiteandwilliams.com) or Chunsheng (Tony) Lu (215.864.7006 |luc@whiteandwilliams.com).


[i] To access the content of Circular 26 and the relevant preferential CIT catalogues for Hengqin, Pingtan and Qianhai in Chinese text, please click on the following link: http://www.szds.gov.cn/szds/gkmltzgg/201406/30783b1edb97485b8003d8389624987e.shtml

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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