China’s special economic zones and income tax

PROVISIONAL REGULATIONS PROMULGATED BY THE STATE COUNCIL OF THE PEOPLE’S REPUBLIC OF CHINA ON REDUCTION AND EXEMPTION OF ENTERPRISE INCOME TAX AND CONSOLIDATED INDUSTRIAL AND COMMERCIAL TAX FOR 14 COASTAL PORT CITIES, AS WELL AS THE FOUR SPECIAL ECONOMIC ZONES AND HAINAN ISLAND

SUBJECT: TAXATION

ISSUING-DEPT: STATE COUNCIL OF CHINA

ISSUE-DATE: 11/15/1984

IMPLEMENT-DATE: 12/31/1984

TEXT:

I. Special Economic Zones

1. A 15 percent preferential enterprise income tax shall be levied on the income derived from production, business and other sources of any joint ventures, cooperative enterprises or enterprises with sole foreign investment (hereinafter referred to as “special zone enterprises”) operating in the special economic zones (hereinafter referred to as “special zones”).

(1) For enterprises engaged in industry, communications and transport, agriculture, forestry and livestock breeding, which have a contract life of 10 years or longer, a two-year tax holiday commencing from the first profit-making year, is allowed, followed by a 50 percent reduction in the three following years (third to the fifth year), upon application and approval by the special zone tax authorities.

(2) Enterprises engaged in the service trade, which have overseas investments exceeding US $ 5 million and a contract life of 10 years or longer, income tax shall be exempted in the first profit-making year, followed by a 50 percent reduction in the two following years (second and third year), upon application and the approval by the special zone tax authorities.

2. Reduction or exemption of local income tax for special zone enterprises shall be decided upon by the people’s governments of the special zones.

3. Foreign participants to a joint venture in the special zones is exempted from enterprise income tax when repatriating profits derived therefrom.

4. A 10 percent income tax shall be levied on income derived from dividends, interest, rentals, royalties and other sources in the special zones by overseas business people who have not set up offices in China, except in cases to which tax exemption is granted according to law. Where further incentives in tax reductions or exemptions are to be given to overseas business people who have provided investment and equipment on favorable terms or transferred truly advanced technology, they shall be decided by the people’s government of the special zones.

5. Consolidated industrial and commercial tax shall be exempted for special zone enterprises importing taxable machines, equipment, raw materials, spare parts and accessories, means of transport and other means of production that are required for their own production purposes, before the special zone control border lines are completed. The import of the means of transport and consumer durables that are on the state restriction list shall be subject to taxation according to the tax rules currently in force. The consolidated tax rate for imported mineral oils, cigarettes and wines and other daily necessities shall be cut by half. After the special zone control border lines are completed, the consolidated tax rate shall also be cut by half for imported mineral oils, cigarettes and wines, but other imported goods shall be free from consolidated industrial and commercial tax. Also exempted will be cigarettes, wines, checked in articles and home appliances brought in by business people in reasonable quantity and are for their own use.

6. Consolidated industrial and commercial tax shall be exempted for export products made by special zone enterprises, except those on the state restriction list or those otherwise provided.

7. A 50% consolidated tax reduction is allowed for products made by special zone enterprises when sold within the special zones; so are for various mineral oils, cigarettes, wines, etc. With the exception of a few products for which the levying of or reduction in the consolidated industrial and commercial tax shall be left to the discretion of the people’s governments of the special zones, all other products are henceforth exempted.

8. If special zone enterprises should ship inland their imported goods on which consolidated industrial and commercial tax was reduced or exempted or products they produce in the special zones, consolidated industrial and commercial tax shall be paid retroactively upon entering the inland areas. But the consolidated industrial and commercial tax shall be free on checked in and other articles brought by foreign business people from the special zones to the inland areas, if they are in reasonable quantities and are for their own use.

9. Consolidated industrial and commercial tax shall be levied according to the tax rate prescribed in the tax rules in force for special zone enterprises on income derived from commercial, communications and transport and service undertakings. The rate on incomes from banking and insurance shall be three percent. Where the above-mentioned enterprises have a need for a reduction or exemption of the consolidated industrial and commercial tax for a fixed period at the initial stage. Of their operations, it shall be decided by the people’s governments of the special zones.

10. For joint ventures, cooperative enterprises and wholly-owned foreign undertakings operating in the Hainan Administrative Zone of Guangdong Province, the reduction or exemption of enterprise income tax and consolidated industrial and commercial tax may be granted with reference to the relevant provisions for the special zones.

II. Economic and Technological Development Zones of 14 Coastal Port Cities

1. A 15 percent preferential enterprise income tax shall be allowed on the income derived from production, business and other sources of any joint ventures, cooperative enterprises or enterprises with sole foreign investment (hereinafter referred to as “development zone enterprises”) operating in the economic and technological development zones (hereinafter referred to as “development zones”). But those with a contract life of 10 years or longer shall, upon application and the approval by the city tax authorities, enjoy a two-year tax holiday, commencing from the first profit-making year, followed by a 50 percent reduction in the three following years (third to the fifth year).

2. The reduction and exemption of local income tax for development zone enterprises shall be decided upon by the city people’s governments.

3. Foreign participant(s) to a joint venture in the development zones is exempted from enterprise income tax when repatriating profits derived therefrom.

4. A 10 percent income tax shall be levied on income derived from dividends, interest, rentals, royalties and other sources in the development zones by overseas business people who have not set up offices in China, except in cases to which tax exemption is granted according to law. Where further reductions or exemption are to be given to overseas business people who have provided investment and equipment on favorable terms or transferred truly advanced technology, they shall be decided by the people’s governments of the city to which the development zone belongs.

5. Consolidated industrial and commercial tax shall be exempted for development zone enterprises’ imported building materials, production equipment, raw and other materials, spare parts and accessories, components and elements, means of transport and office supplies that are for their own use. If development zone enterprises should use such tax exempt imported raw and other materials, spare parts, accessories, components or elements to process products for sale in China, they are to pay retroactively the required consolidated industrial and commercial tax.

6. Consolidated industrial and commercial tax shall be exempted for products made and exported by development zone enterprises, the exception being those on the state restriction list. Products sold in China shall be subject to taxation as prescribed by tax rules in force.

7. Consolidated industrial and commercial tax shall be exempted for household articles and private vehicles brought in by overseas employees or by overseas business people living in the development zones – upon the presentation of the documents issued by the administrative committees of the related development zones and on the condition that the said articles and vehicles are in reasonable quantity or number of units.

III. Other Parts of the 14 Coastal Port Cities and Shantou, Zhuhai and Xiamen

1. A 15 percent preferential enterprise income tax shall be allowed, upon the approval by the Ministry of Finance for joint ventures, for cooperative enterprises and enterprises with sole foreign investment operating within the original city limits of the 14 coastal port cities and of Shantou, Zhuhai and Xiamen (hereinafter referred to as “old city enterprises”), whose operations or investments are technology- or knowledge- intensive, have overseas investments exceeding US $ 30 million, require a long lead time, or belong to the fields of energy, communications and port construction.

A 20 percent tax reduction is allowed on the basis of the existing enterprise income tax rate prescribed in the tax rules in force, subject to approval of the Ministry of Finance, for old city enterprises in the following fields of productive operations which are not entitled to tax reduction as prescribed in the preceding paragraph:

(1) machine building, electronics industry;

(2) metallurgy, chemicals, building materials;

(3) light industry, textiles and packaging;

(4) medical apparatus, pharmaceuticals;

(5) agriculture, forestry, animal husbandry, aquaculture, and their related processing industries;

(6) building construction.

The reduction and exemption of enterprise income tax shall be implemented according to the preferential tax rate mentioned above and within the prescribed period of time and scope set in the income tax law for Chinese-foreign joint ventures and the foreign enterprise income tax law.

2. The reduction and exemption of local income tax for old city enterprises shall be determined by the city people’s governments.

3. A 10 percent income tax shall be levied on income obtained from dividends, interest, rentals, royalties and other sources in the old cities by overseas business people who have not set up offices in China, except in cases to which tax exemption is granted according to law. Where further incentives in tax reductions or exemptions are to be given to overseas business people who have provided investment and equipment on favorable terms or transferred truly advanced technology, they shall be decided by the city people’s governments.

4. Consolidated industrial and commercial tax shall be exempted for production equipment, office or business equipment and building materials imported by old city enterprises as part of the investment or additional investment of their overseas partners, as well as for vehicles and office supplies imported for their own use.

5. Consolidated industrial and commercial tax shall be exempted for export products made by the old city enterprises, except those products that are on the state restriction list. Products sold in China shall be taxed according to tax rules in force.

6. Consolidated industrial and commercial tax shall be exempted for raw and other materials, spare parts and accessories, components and elements and packaging materials imported by old city enterprises for making export products; but those imported for producing products to be sold in China shall be taxed according to tax rules in force.

7. Consolidated industrial and commercial tax shall be exempted for household articles and private vehicles brought in by overseas employees working in the old city enterprises or by overseas business people living in the old cities – upon presentation of the documents issued by the departments in charge of the city people’s governments and on the condition that the said articles and vehicles are in reasonable quantity or number of units.

IV. Date of Enforcement

The provisions about the income tax reduction and exemption in these regulations shall be implemented from the 1984 tax year, while the provisions about the reduction and exemption of consolidated industrial and commercial tax shall be effective on December 1, 1984.