Importing From China: What Your Options Are
Additional incentives offered by local and provincial governments significantly increase the foreign investors incentive package. They tend to become more generous as one moves westward from the coastal provinces to the heavily populated interior, this allowing the foreign investor to cash in on Chinas fierce domestic competition for foreign investment. There are national regulations, however, that are applicable to the tax incentives that a local government is entitled to offer Foreign Invested Enterprises (FIEs), and if these limits are exceeded by overenthusiastic local governments they can be revoked by the national government (hopefully any such revocation would not apply retroactively to FIEs).
Central Chinas Henan province serves as a good example. Henan offers manufacturing-oriented FIEs complete waivers of business tax and a many local administrative fees. Furthermore, FIEs that are engaged in technology transfer, development, and related consulting are eligible for a full refund of business tax already paid.
Regional Tax Incentives Offered By Henan Province
Production-Oriented Foreign Invested EnterprisesWaiver of Local Income Tax and fees for city construction, urban expansion, water resources protection, landscaping, and wall reconstruction. Transaction handling charges for purchasing production / operation sites are also waived.
Enterprises and R&D centers dealing with technology transfer, development and services Certain income can be exempted from corporate income tax after approval.
Municipal governments tend to be even more generous than the provinces. Zhengzhou (a city of about 4 million in central China) is a good example. Zhengzhou offers the following incentives to local FIEs:
Tax Incentives for Reinvestment of Profits Locally – Local FIEs that reinvest their profits locally receive a 30% refund of the locally retained portion of Enterprise Income Tax paid on the reinvested profits (the national government offers an even more generous refund of the nationally retained portion).
Investment in Pillar Industries and State-owned Enterprises – Zhengzhou grants a 50% refund for three years on the locally retained portion of Enterprise Income Tax already paid on foreign investment funds invested in designated pillar industries. It also offers financial incentives for investing in provincially administrated state-owned enterprises. In order to discourage mass layoffs, this incentive is increased if the FIEs retains a given percentage of the enterprises original employees.
Inward Remittance of Export Earnings – Zhengzhou offers cash payouts of 0.2% to 0.5% of every dollar of hard currency export earnings that is remitted inward (the best payouts are reserved for the export of technologically advanced products).
Matching Funds – Zhengzhou provides one-to-one matching funds for international market development funds of small to medium-sized exporting enterprises if they are supervised at the provincial level (whether an enterprise is supervised at the provincial level or the national level depends the size of its investment – its Registered Capital; see examination and approval authority for details).
Anti-Dumping Insurance – Zhengzhou will assist FIEs in responding to antidumping initiatives. It also offers subsidies for expenses arising out of participation by exporters in antidumping responses to the extent that these initiatives are not already being subsidized by provincial or national authorities. It may seem a bit odd for a U.S. company to establish an enterprise in China, get involved in a lawsuit filed by the United States for dumping its products, and be subsidized by the Chinese government for expenses necessary to defend the lawsuit, but its possible.
Interest Subsidy for Loans Secured by Tax Refund Accounts- Zhengzhou will subsidize a sum equal to 70% of the interest payable on loans that are secured by a tax refund account. If the FIE has not taken out such a loan, Zhengzhou offers a subsidy equal to 50% of the interest that would have been paid on such a loan had it been taken out it will even provide the fund from which the interest is subsidized. Enterprises that have an annual export volume of at least US$5,000,000 in the previous year and are verified by the National Tax Bureau to have an increased tax refund due for the current year will receive a 100% subsidy.
Export Incentives – An export enterprise with either (ii) an annual export volume of at least US$10,000,000 and actual export volume of at least 25% more than the previous year, or (ii) annual export volume of at least US$5,000,000, an increase in export volume of more than 40% over the previous year, and inward remittances from exports at least 80% of sales volume, will be named a Zhengzhou Advanced Foreign Exchange Generating Export Enterprise and awarded a 30,000 RMB prize (roughly $3,500 US dollars) as long as it has not committed serious regulatory violations during the year preceding the award.
Basic Tax Rate – The nationally-mandated basic Enterprise Income Tax rate for foreign invested enterprises is 33%, including a 3% surcharge that is retained by local governments. However, because Zhengzhou has been classified by the national government as a city open to foreign investment and trade, the Enterprise Income Tax rate of production-oriented FIEs located within the city is reduced to 24%. Furthermore, since the Zhengzhou Economic & Technical Development Zone (an industrial park located within urban Zhengzhou) has been designated as a National Economic & Technical Development Zone, the Enterprise Income Tax rate for production-oriented FIEs located therein has been further reduced to only 15%.