FTP Plan measure |
Detailed rules |
KPMG observations |
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➢ Implementation before 2025 |
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CIT |
CaiShui [2020] No. 31 |
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- A reduced 15% CIT (China standard rate is 25%) rate applies to enterprises (i) registered in Hainan FTP; (ii) engaged in substantive business activities; (iii) in encouraged industries
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- Circular 31 requires establishment of the enterprise’s management body in Hainan FTP
- This must exercise substantive management and control over business operations, staff, accounting, assets, etc.
- “Encouraged industries” refers to sectors listed in the Guiding Catalogue for Industrial Structure Adjustment (2019 Edition), the Catalogue of Encouraged Industries for Foreign Investment (2019 Edition) and a new Hainan-specific list
- Enterprise revenue from “encouraged industry” business must be at least 60% of the total
- 15% tax rate applies to income of head offices and branches set up in Hainan FTP
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- While yet to be clarified, it is anticipated that the ‘substantive management’ requirement may be fairly robust. The requirements may draw on domestic anti-avoidance and TP rules, as well as BEPS concepts
- This could require the enterprise to have functions, including decision-making capacity, commensurate with profitability. It could also require organisational resources, premises and personnel commensurate with enterprise functions
- The Hainan-specific list is expected to include various sectors within tourism, modern services, and high-tech industries
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- CIT exemption for “new” foreign-sourced income received by Hainan FTP enterprises in the tourism, modern services and high-tech industries
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- New foreign-sourced income refers to:
- Operating profits earned by newly established overseas branches of the Hainan company; or
- Dividends repatriated from an overseas subsidiary in which the Hainan company has a shareholding of at least 20%. The dividends must arise from new direct investment made in the overseas subsidiary
- The statutory CIT rate of the investee jurisdiction must not be lower than 5%
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- Exemption does not cover asset transfer gains
- Calculation for exempt dividends yet to be clarified
- As subsidiaries in zero tax offshore jurisdictions (e.g. Cayman, BVI) do not qualify this has implications for structuring China outbound investment
- As China-to-China dividend payments are exempt, this may open a path for China MNE parent companies to use the foreign source dividend exemption by structuring foreign holdings via Hainan. Remains to be confirmed
- The exemption, limited to 2024 under Circular 31, is expected to be extended
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- 100% expensing, and accelerated depreciation regimes for eligible capital expenditure
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- Applies for newly purchased fixed assets (except for immovables) and intangible assets
- No limitations on industry or based on usage of assets. 100% expensing only for assets with a unit value less than RMB 5 million
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- Buildings excluded from scope of fixed assets
- Intangible assets yet to be defined for the purposes of the relief
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CaiShui [2020] No. 32 |
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- IIT exemption designed to produce maximum 15% IIT rate for income of personnel with high-end and urgently-needed skills, working in Hainan FTP
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- Comprehensive income, operating income and Hainan government subsidies covered
- Exemption obtained with IIT annual filing
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- Exemption does not cover investment or asset transfer income.
- Exemption should cover income of partners in a fund, as operating income, though more clarity needed
- Eligibility criteria will consider residence permit (hukou), social security contributions, and number of days spent in Hainan (possibly 183 day requirement)
- Remains to be seen how non-resident individuals can access exemption (they are not required to perform the annual IIT
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VAT |
To be clarified |
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- Consolidate various turnover taxes (VAT, consumption tax, vehicle purchase tax, etc) into single ‘sales tax’, levied at ‘retail stage’ on goods/services
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- Detailed collection rules for ‘sales tax’
- Interaction with turnover tax regimes elsewhere in China
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- China plans to further ‘simplify’ its VAT rates structure so the same is expected for ‘sales tax’
- ‘Retail stage’ needs to be further defined
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➢ Implement before 2035 |
To be clarified |
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- 15% CIT rate scope expanded all Hainan FTP enterprises not in a ‘negative list’ sector
- IIT levied at 3%, 10% and 15% rates for all individuals (not just special skills) in Hainan FTP for 183 days in year
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- Industries on the negative list need to be clarified
- Day-count rule for 183 days
- Requirements for social security contributions
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- CIT/IIT revenues to be shared by central and local governments
- Revenues from ‘sales tax’ and other taxes deemed as local revenues
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