Making Good Use of the Local Policies

Commercial laws the local government everywhere in China has established according to the local needs and local condition, must be known and made good use of if one wants to invest or to do business in a certain area. Even in the same region the policies and regulations are not the same in different districts. For example, in the high-tech zone, industrial development area or tax-bond zone there are some special priorities in many respects, such as taxation, land-usage and so on. What is more, China is undergoing a social and economic transformation which has never been seen in the Chinese history and even in the world history, which means new policies, new regulations and new approaches may appear every day. Therefore, one must keep an eye on the latest developments and grasp the opportunities which may appear and take the relevant action leading to success. Many success stories of foreign-owned enterprises show that the relationship between the enterprises and the local authorities is excellent. For example, the Motorola Electronic Company, which is the largest foreign-owned enterprise in China, got a lot of help and support from the Municipal Government of Tianjin, where the company is located. The following are some of the examples of different areas with different policies.

Special Economic Zones

This is a zone opened by a sovereign country or region to practice a special economic administration system and implement special economic policies. There are now the following SEZs: Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan Island. The SEZs are an indication of the opening of China's hinterland to the outside world. The SEZs have been established as experimental zones for the economic reform of this country. Whenever a new policy is formulated, an experiment is first made in the SEZs before the new reform is carried out elsewhere.
For the foreign investors who invest in setting up factories in the Special Economic Zones, the Chinese government has formulated some of the preferential policies:

1. When foreign investors set up Chinese-foreign joint ventures, Sino-foreign cooperative enterprises or enterprises exclusively owned by foreign capital (hereinafter referred to as the "foreign-invested enterprise") in the special economic zones, whether production enterprises or non-production enterprises, their income shall be taxed at the reduced rate of 15 percent. Production enterprises in industry, transport, agriculture, forestry and stockbreeding with an operation term of 10 years or longer shall be exempted from income tax in the first and second profit-making years, and shall have their income tax reduced by half in the third, fourth and fifth years, Enterprises in the service trades whose investment exceeds US $ 5 million and whose operation term exceeds 10 years shall be exempted from income tax, in the first profit-making year and have their income tax reduced by half in the second and third years.
   
2. If a foreign-invested enterprise with foreign investment is confirmed to be an advanced technology-type enterprise,: it shall have its income tax reduced by half for three more years after the expiration of the above exemption-reduction period. If it is confirmed to be an enterprise with products for export, its income shall be taxed at the reduced rate of 10 percent in the year when its export output value accounts for more than 70 percent of all output.
   
3. As for the exemption from and reduction of the local income tax of a foreign-invested enterprise, it is up to the people's government of the special economic zone to decide.
   
4. If the foreign investor of a Chinese-foreignj0int venture in a special economic zone remits his or her share of the profits from the enterprise outside China, he or she shall be exempted from the remittance tax.
   
5. Dividends, interest, rent, royalties and other income of a foreign investor who has no office in China but has sources in one of the special economic zones shall be subject to income tax at the reduced rate of 10 percent, except for those exempted from income tax according to law. If the foreign investor has preferential terms for the funds and equipment he or she provides, or if the technology he or she transfers is advanced and should be entitled to more reduction or exemption, it is up to the people's government of the special economic zone to decide.
   In addition, special preferential treatment shall be given to the projects that confirm to the Provisions for Encouraging Foreign Investment issued by the State Council.

Coastal Open Cities

The coastal open cities are coastal port cities where special open policies are followed. 14 coastal cities exist now: Dalian, Qinhuangdao, Tianjin, Yantai, Qngdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai. These open cities offer preferential policies to the investors. On technology-intensive and knowledge-intensive ventures or on energy and transport projects, the enterprise income tax will be collected at a rate of 15 percent. On industrial and agricultural projects, the income tax will be collected at a rate of 24 percent. The Chinese government has formulated and adopted the following preferential policies for the coastal open cities:

1. The production enterprises established in the old urban districts of the 14 coastal open cities in the form of Chinese-foreign joint ventures, cooperative enterprises and wholly foreign-owned enterprises (hereinafter referred to as the "enterprises in the old urban districts") shall be subject to the enterprise income tax at the rate of 24 percent, with the approval of the Ministry of Finance, if they are technology-intensive or knowledge-intensive enterprises, or enterprises each with a foreign investment of US $ 30 million or more and along recovery period, or projects for energy, transport and harbor construction.
   
   The enterprises in the old urban districts that do not conform to the conditions cited in the above clause, but are in the following industries, shall be subject to the enterprise income tax at the rate as prescribed in the Tax Law with an 80 percent discount, with the approval of the Ministry of Finance: machine-building, metallurgical, chemical, building materials, light, textile, packing, building, medical instruments and pharmaceutical industries, agriculture, forestry, aquatics breeding and their processing industries.
   
   The reduced enterprise income tax for the enterprises in the old urban districts shall be collected at the above preferential rates within the time limits and scope as prescribed in the Income Tax Law of the Chinese-Foreign Joint Ventures and the Income Tax Law of the Foreign Enterprises.
   
2. The exemption from and reduction of the local income tax of an enterprise in the old urban districts shall be up to the local people's government to decide on the matter.
   
3. Dividends, interest, rent, royalties or other income of a foreign investor who has no office in China but has sources in the old urban districts shall be subject to the income tax at the reduced rate of 10 percent, except for those exempted from income tax as prescribed in the laws. If the foreign investor has preferential terms for the funds and equipment he or she provides, or the technology he or she transfers is advanced, whether it shall be entitled to more tax reduction and exemption is up to the people's government to decide.
   
4. Equipment for use in production or in the business operation, the building materials imported by an enterprise in the old urban districts in the form of investment or additional investment, and the means of transport and office goods imported for its own use shall be exempted from the import duty and the consolidated industry and commerce tax.
   
5. The government permits foreign shareholders to be legal persons, such as the chairman of the board of directors of a joint venture.
   
6. It imposes no restrictions on the operation term of foreign invested enterprises in general. Even if there is a restriction in some industries, the operators may apply to the government for an extension of the operation term upon the expiration of the contract.
   
7. It permits foreign-invested enterprises to directly buy raw materials from the international market and sell its products to the international market.
   
8. The Chinese government encourages foreign-invested enterprises to employ its staff members and workers in China and also permits them to employ technical specialists and senior managers from abroad.
   
9. It adopts a policy of low taxation for foreign-funded enterprises, with the rates lower than the income tax rates for state-owned enterprises and those for collective enterprises.
   
10. It gives even more preferential tax treatment to investors who make investments in key industries and key developing regions the development of which is encouraged by the Chinese government.
    
    In order to encourage foreign investors to make direct investments in China, the Income Tax Law of the People's Republic of China on Enterprises with Foreign Investment and Foreign Enterprises adopted at the Fourth Session of the Seventh National People's Congress became effective on July 1, 1991. The preferential treatments for foreign investors contained in the law can be summed up in the following four ways:
    
    First, foreign investors enjoy different treatments for their investments in different regions. The income of all joint ventures, cooperative enterprises and foreign enterprises opened in the special economic zones shall be subject to income tax at the reduced rate of 15 percent. The income of the production enterprises opened in the economic and technological development zones shall be subject to income tax at the reduced rate of 15 percent. The income from the technology-intensive and knowledge-intensive projects built in the economically open zones and old urban districts or from projects with a foreign investment of US $ 30 million or above and a long investment recovery period, or projects in energy, transport and harbor construction shall be subject to income tax at the reduced rate of 15 percent. The income tax shall be at the reduced rate of 24 percent for enterprises with foreign investments set up in the machine-building and electronic industries; the metallurgical, chemical and building materials industries; the light, textile and packing industries; the medical instruments and pharmaceutical industries; agriculture, forestry, aquatics and stock breeding and their processing industries, and the building industry. Moreover, the dividends, interest, rent and royalties obtained from the above zones shall be subject to the advance income tax at the reduced rate of 10 percent.
    
    Second, Chinese-foreign joint ventures with an operation term of 10 years and longer shall be exempted from income tax for the first two profit-making years and shall have their income tax reduced by half in the following three years. The production enterprises with foreign investment set up in the special economic zones and economic development zones with a foreign investment exceeding US $ 5 million and an operation term of 10 years or longer shall be entitled to the preferential treatment of tax exemption for the first year and tax reduction by half for the following two years.
    
    Third, more preferential treatments shall he given to enterprises that are encouraged to expand their production. For example, technologically advanced enterprises shall have their income tax reduced by half for three more years after the expiration of the period for income tax reduction and exemption; and those that are not entitled to the period for income tax reduction and exemption shall be given the preferential treatment of having their income tax reduced by half for three years. When a foreign investor in a Chinese-foreign joint venture among technologically advanced enterprises or those whose products are for export remit their share of profit from the enterprise outside China, the remittance shall be exempted from income tax. The income obtained from special technologies provided for the development of energy resources, the development of transport facilities, the prevention and control of environmental pollution and the development of important technological fields shall be subject to income tax if the technologies are advanced and the terms are preferential.
    
    Fourth, if the foreign investor in a Chinese-foreign joint venture or a foreign enterprise reinvests his share of the profit from the enterprise in China for a period of not less than five years, 40 percent of the income tax payments for the reinvestment shall be refunded. If the foreign investor in a joint venture, a cooperative venture or a wholly foreign-owned enterprise reinvests in an enterprise employing advanced technology and exports its products for a period of not less than five years, all income tax payments for the reinvestment shall be refunded.
    

New- and High-tech Industrial Development Zone

The government has established 14 national new- and high-tech development zones. These parks are all located in the economic and technological development zones or in the special economic zones. The State Science and Technology Commission has also decided on the establishment of two new- and high-tech industrial development zones along the Suzhou-Wuxi-Changzhou belt and the Pearl River Delta. Moreover, the government has also approved the establishment of 18 economic and technological development zones.

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