How to Benefit from Hainan Free Trade Port’s Preferential Tax Policies

UPDATE (September 28, 2022): The Individuals’s Authorities of Hainan Province launched on September 18, 2022 the Interim Measures for the Record-based Administration of Excessive-end and Urgently Wanted Abilities Eligible for the Preferential Particular person Earnings Tax Coverage within the Hainan Free Commerce Port, to be efficient on January 1, 2023. The Measure made additional clarifications on the situations to be met for entry to the IIT incentives in Hainan. 

• International buyers ought to word Hainan Free Commerce Port’s incentives to draw corporations embrace a lowered company earnings tax price for enterprises, tax exemption for abroad earnings, one-off pre-tax deduction and accelerated depreciation and amortization for newly bought property, in addition to particular person earnings tax relaxations.
• These preferential insurance policies are relevant from January 1, 2020 to December 31, 2024. They had been confirmed in two circulars launched by the finance and tax authorities.
• These comply with China’s earlier announcement of the General Plan for the Development of Hainan Free Commerce Port aiming to remodel Hainan right into a high-level free commerce port.

On June 30, 2020, the Ministry of Finance (MOF) and the State Taxation Administration (STA) launched the Round about Preferential Company Earnings Tax Coverage for Hainan FTP (Cai Shui [2020] No.31) and the Round about Particular person Earnings Tax Coverage for Excessive-Finish and Urgently Wanted Abilities at Hainan FTP (Cai Shui [2020] No.32). The 2 circulars include preferential insurance policies and incentive schemes which are relevant from January 1, 2020 to December 31, 2024. Based on the Cai Shui [2020] No.31, enterprises registered within the Hainan Free Commerce Port (FTP) will get an opportunity to get pleasure from the next three main company earnings tax (CIT) relaxations:

• Enterprises in inspired industries and fascinating in substantive operations are entitled to CIT at a lowered tax price of 15 p.c;
• Earnings from new abroad direct funding derived by enterprises within the tourism, trendy service, and high-tech business could also be exempted from CIT; and
• Eligible capital expenditures might be allowed one-off pre-tax deductions or accelerated depreciation and amortization.

Based on the Cai Shui [2020] No.32, the person earnings tax (IIT) price is capped at 15 p.c for ‘high-end’ and ‘urgently wanted’ skills working on the Hainan FTZ. This text goals to supply an in depth interpretation of those two preferential tax insurance policies.

Software of preferential company tax insurance policies

Lowered company earnings tax price of 15 p.c

Presently, the statutory CIT price in China is 25 p.c. Nonetheless, enterprises might get pleasure from a good CIT price of 15 p.c in Hainan, in the event that they meet the next three standards:

• The enterprise is registered within the Hainan FTP;
• The enterprise has substantive operations within the Hainan FTP; and
• The first enterprise of the enterprise is on the listing of inspired industries within the Hainan FTP.

By substantive operation, authorities seek advice from the precise administration of the enterprise, such because the board of administrators and board of shareholders, who must be primarily based in Hainan FTP and should implement substantive administration and management over the enterprise’s manufacturing and enterprise operations, workers, accounts, and properties from Hainan.

As well as, the principle enterprise of the eligible enterprise should be within the inspired industries of Hainan. The earnings from the principle enterprise of the enterprise should additionally represent 60 p.c or extra of its complete earnings. To find out if your online business falls below the inspired industries in Hainan FTP, buyers can seek advice from the Guiding Catalogue for Industrial Construction Adjustment (2019 Version), the Catalogue of Inspired Industries for International Funding (2019 Version), and {the catalogue} of inspired industries newly added in Hainan FTP. International-invested enterprises ought to primarily seek advice from the inspired catalogue for international funding. In case any of those respective catalogues are revised, the revised variations shall prevail with speedy impact. To be famous, the 15 p.c CIT price is relevant solely to the earnings of head places of work and/or branches arrange in Hainan FTP. Any earnings from head places of work and/or branches outdoors of Hainan FTP shouldn’t be eligible for this preferential tax price

Tax exemption on abroad earnings

The statutory CIT price on earnings from abroad direct funding of resident enterprises in China is presently 25 p.c. However in Hainan, the CIT is exempt on such abroad earnings, if the next standards are met:

• The earnings is derived by corporations within the tourism, trendy service, and high-tech sectors included within the inspired industries in Hainan FTP; and
• The earnings is from newly elevated abroad direct funding.

On the identical time, such abroad earnings should fulfill the next situations:

• The abroad earnings is the operational income of newly established abroad branches, or dividend earnings akin to the brand new direct funding obtained from the abroad subsidiaries with a 20 p.c plus (inclusive) fairness held by the guardian firm; and
• The statutory CIT price of the invested nation or area shouldn’t be lower than 5 p.c.

That’s to say, earnings from fairness switch can’t benefit from the tax exemption nor can abroad earnings from tax havens just like the Cayman Islands.

One-off pre-tax deduction or accelerated depreciation and amortization for newly bought property

For an enterprise established in Hainan FTP, its newly bought mounted property or intangible property with a unit worth of not more than RMB 5 million (US$775,000) are allowed to be included within the present prices and bills and to be totally deducted on a one-time foundation earlier than calculating the taxable earnings, and there’s no must yearly calculate depreciation and amortization. If the unit worth of the brand new property exceeds RMB 5 million (US$775,000), the depreciation or amortization interval might be shortened, or the accelerated depreciation or amortization technique might be adopted.

The newly bought mounted property and intangible property embrace these property which are self-constructed and self-developed however exclude homes and buildings. The one-off pre-tax deductions or accelerated depreciation and amortization for brand spanking new property are anticipated to cut back the present tax burden of enterprises, enhance their money movement, and encourage them to improve their gear and expertise in time.

Software of preferential particular person earnings tax insurance policies 

Presently, particular person earnings tax in China is levied at a progressive price, starting from three p.c to 45 p.c with seven tax brackets. Operation earnings tax can also be levied at a progressive price, starting from 5 p.c to 35 p.c with 5 tax brackets. Nonetheless, in accordance with Cai Shui [2020] No.32, for high-end skills and skills in brief provide working at Hainan FTP, the portion of their precise IIT burden exceeding 15 p.c shall be exempted. The next varieties of earnings sourced from Hainan FTP shall be eligible:

• Complete earnings, similar to wages and salaries, remuneration for labor companies, writer’s remuneration, and earnings from royalties;
• Operation earnings; and
• Expertise subsidy earnings acknowledged by Hainan Province.

This suggests that earnings from funding, similar to dividends and bonuses, and earnings from property switch, similar to fairness and actual property switch, are to not be included. Taxpayers finishing the formalities for annual closing settlement of IIT in Hainan Province might benefit from the aforesaid preferential insurance policies. That’s to say, eligible Hainan skills nonetheless must pay IIT in accordance with China’s normal IIT price within the present 12 months first. When the ultimate settlement is made the following 12 months, the Hainan tax bureau will refund the portion of the IIT that exceeds 15 p.c of the particular taxable earnings. An inventory of professions that qualify as high-end expertise and expertise in brief provide who can benefit from the aforesaid preferential insurance policies and particular administrative measures was launched in August 2020 and not too long ago amended in September 2022. Based on the brand new administrative measures to be efficient from January 1, 2023, to qualify for the IIT incentives in Hainan, the candidates typically want to satisfy the next situations:

• Situation I: Residing within the Hainan FTP for a complete of 183 days inside a tax 12 months; and
• Situation II: Being skills as acknowledged by the expertise administration departments of assorted ranges in Hainan or receiving earnings of over 300,000 yuan within the Hainan FTP inside a tax 12 months.

For particular personnel in aviation, delivery, offshore oil and gasoline exploration, and different industries who’ve resided in Hainan FTP for lower than 183 days in a tax 12 months resulting from their occupation traits, can benefit from the preferential IIT insurance policies by satisfying some additional situations along with situation II, after making use of to the tax authorities throughout the stipulated interval and passing the overview. The additional situations embrace:

• Having contributed to the fundamental pension insurance coverage for workers within the Hainan FTP for greater than six months (together with the month of December of the present 12 months) consecutively inside a tax 12 months (aside from an individual who’s exempted from social insurance coverage contribution primarily based on the social safety settlement signed between the house nation and China); and
• Having entered right into a labor contract (or paperwork of the identical form) with a time period of 1 12 months or longer with an enterprise or group registered and working substantively within the Hainan FTP.

The preferential tax system of Hainan FTP is anticipated to draw many enterprises or the relocation of companies in inspired industries. You’re welcome to contact our professionals for clarifications on how Hainan’s preferential insurance policies might apply to your online business and derive sensible options. Please e-mail us at China@dezshira.com.

(This text was first revealed on July 7, 2020 and final up to date on September 28, 2022)