China Finalizes Shanghai Free Trade Zone Reforms

by Mary Swire, Tax-News.com, Hong Kong

02 October 2013

Before it was officially launched on September 29, China's State Council issued the general plan for the country's first pilot free-trade zone (FTZ) in Shanghai that will ease restrictions on renminbi convertibility, financial and insurance services, trade and investment.

In what is seen as an essential step towards upgrading China's economy through the liberalization of services and trade, with an eventual roll-out nationwide in other chosen areas, Shanghai has built the FTZ around its existing comprehensive bonded zones at Waigaoqiao, Yangshan and Pudong Airport, which are reported to have serviced total trade of more than USD100bn in 2012.

While certain expected measures have not been included in the plan, such as an easing of internet restrictions, and with its reforms expected to be established prudently and in a gradual manner, the FTZ (or, as it has been more aptly called, the "free-market area") goes beyond a further liberalization of trade to be significantly more advantageous for financial services and investment.

For example, Shanghai will strengthen its role in financial services, as foreign-funded banks and joint venture banks will be allowed to be set up in the FTZ and banks will be able to act within a foreign exchange settlement center for international trade. While the Council's plan did not commit to full convertibility of the RMB or interest rate liberalization, measures will be introduced in that respect, with the Shanghai FTZ being used to try out these reforms ahead of other parts of China.

Given the port and airport location of the FTZ, there are policies to abolish the capital requirements for single aircraft or single vessel company subsidiaries set up by financial leasing companies (FLCs); to relax the existing limits on foreign investment shareholdings in joint venture international shipping companies; and to allow for wholly foreign-owned international ship management companies.

There is already a tax exemption on business income and revenues arising from international shipping, transporting, warehousing, and shipping insurance for companies registered in the FTZ port areas, and FLCs will now also benefit from preferential tax rates on the import of planes with a net weight of above 25 tonnes.

The plan also offers further tax incentives for investment and trade. While zero customs duties and import taxes will continue to apply to goods transferring between the FTZ and overseas destinations, and with domestic merchandise entering the FTZ being regarded as having been exported, with exporters enjoying an immediate tax rebate, tax exemptions are also to be granted to companies registered in the zone on their imports of machines and productive equipment.

In addition, in order to promote investment in the FTZ, companies and individuals will be able to pay income taxes by installments over a five-year period for revaluations arising from asset restructuring.

However, the plan does point out that, "in line with the direction of tax reform and international practice," it should be borne in mind that the FTZ's tax policies will remain subject to study and adaptation, so as not to erode the tax base and to align them with China's overall tax system regarding foreign equity investment.