Hainan Free Trade Port–Preferential Tax Policies Issued

This article is drafted by Surui Qu with contribution from Holly Blackwell.

On June 23, 2020, the Chinese Ministry of Finance and State Taxation Administration issued Circulars that contain preferential tax policies for businesses in the Hainan Free Trade Port (Hainan FTP).

Corporate Income Tax (CIT) Preferential Policies

According to the Circulars:

• a preferential 15% CIT rate applies to enterprises engaged in "encouraged industries";
• a CIT exemption applies to overseas-sourced income by enterprises engaged in tourism, modern service, and high-tech industries; and
• pre-tax expenditures may be deducted and depreciation may be accelerated.

The standard CIT rate in China is 25%. The preferential 15% CIT rate will apply to enterprises engaged in encouraged industries that are registered and have substantial operations in the Hainan FTP.

To qualify for the preferential 15% CIT rate:

(i)      the enterprise must be engaged primarily in one of the "encouraged industries" listed in the Guiding Catalogue for Industrial Structure Adjustment (2019 Edition) (Chinese only), the Catalogue of Encouraged Industries for Foreign Investment (2019 Edition) (Chinese only), or a new list of industries encouraged by the Hainan FTP (to be released);

(ii)       the enterprise's revenue from the "encouraged industry" must account for at least 60% of its total revenue; and

(iii)     the managerial body that exercises substantive management and control over the enterprise's business operations, staff, accounting, and assets must be located in the Hainan FTP.

The preferential 15% CIT rate will apply to the head office and/or branches established in the Hainan FTP.

Individual Income Tax (IIT) Preferential Policies

The Circulars also provides preferential IIT policies. For the years 2020 to 2024, an IIT regime that caps the IIT rate at 15% will apply to individuals who qualify as "high-end talent" or "talent in short supply". By comparison, the standard IIT rate in China is capped at 45%.

The Circulars do not define "high-end talent" or "talent in short supply". By comparison to other policies, foreign personnel who qualify as "high-end talent" or "talent in short supply" may include those who qualify as Class A talent in China's visa system (e.g., senior-level executives) or those with specialist (e.g., technical, management, or business) skills engaged in prioritized industries. The Circulars are expected to apply to domestic personnel as well, though there is less clarity in how these terms might be construed to domestic persons, as comparable policies vary widely at local and provincial levels.

Individual income covered by the preferential IIT policy includes: (i) comprehensive income (i.e., income from wages and salaries, remuneration for labor services, and author's remunerations and royalties); (ii) operating income; and (iii) Hainan government subsidies.