Formation Company & Tax Advisory

Friday, September 21, 2018

Tax Incentives in China

All companies are looking at China as a new market where you can distribute high-quality products, high-tech or design, or to locate productive equipment while taking advantage of low-labour costs and raw materials. Few people know that China is a tax haven for businesses.

The Chinese Law provides incentives and tax breaks for those companies incorporated in China on foreign capital.

According to the agreements undertaken when accessing to the World Trade Organization (WTO), barriers to the entry of foreign companies in the Chinese market have been removed, with the result that many companies with the result that many companies have chosen to locate their manufacturing base in China or distributing fine western products in China for their high-tech or design (conquering a new market for luxury goods). In a nutshell, the rapid economic growth in China explains why companies around the world are willing to seize the opportunities of this huge market.

With the intention of attracting foreign investors in certain sectors considered to be of strategic interest, China continues to offer tax incentives to projects in the fields of environmental protection, of development of agriculture, water conservation and other technology.

The new Law on the taxation of corporate income, which is the - Corporate Income Tax Law - applied and its implementing decree, that entered into force on January 1st, 2008, provide the opportunity for companies that have been awarded the title of "high-tech company" to benefit from a preferential tax rate of 15%, compared to the common law which is currently 25%. After the promulgation of the above mentioned tax reform, the Chinese legislature has modified and reinforced consequently the conditions for obtaining the status of "high and new technology".

Only those companies legally established in mainland China for at least one year and who meet the six conditions listed below, may qualify for this award:

  • Exclusive holder of a "key" intellectual property right registered in China.
  • Field of activity: electronic information, new medicines, aeronautics and aerospace, advanced materials, new energy and energy saving, environment and natural resources, transformation of traditional industries through the use of new technologies, business services to other technology.
  • The scientific and technical staff of college education must represent at least 30% of the actual personnel of the society of which must devote at least 10% of R&D - Research & Development (R&D). The company should carry out R&D continuously and without interruption. The proportionof investment costs in R&D of the company over the last three financial years must represent a minimum percentage of turnover. If you are not yet three years since the establishment of the company, the calculation is made on the basis of the actual number of years of activity. The proportion of expenditure on R&D conducted in China and the total amount of expenditure incurred in the world in R&D should not be less than 60%.
  • The income from products or services of the high and new technology companies must represent at least 60 % of the total income for the year in progress.
  • Other parameters: management methods and organization of R&D activities, the ability to transform into products or services, the results obtained in R&D, number of intellectual property rights held, increased turnover and profit.

As mentioned above, the foreign capital company, i.e.- Foreign Investment Enterprise (FIE)-, in high-tech sectors can benefit from the reduction to 15 % of the Corporate Income Tax (CIT). In the case of Shanghai, to be eligible for this benefit, companies involved in high technology areas must write to the - Science and Technology Commission – in the district where the investment is located, and this commission  in turn forwards it to the - Science and Technology Commission – of the Municipality of Shanghai. If the request is accepted the company will get a refund of all fees paid in excess from the reduced rate and, since then you will be given the status of "high-tech company" and the right incentive for three years, after which the company will have to check with a new request if their status is confirmed.

The new regime recognizes the possibility of tax breaks to benefit from the reduction of 20% of the Corporate Income Tax (CIT) to FIE with the following requirements:

  • Industrial Companies with a taxable income of less than RMB 30 million, a staff of fewer than 100 units and total assets of less than three billion RMB.
  • Other Companies with a taxable income of less than RMB 30 million, a staff of fewer than 80 units and total assets less than 10 million RMB.

Other "Tax Incentives" are also recognized in some - Special Economic Zones - and in the less developed western regions of China.

Bright Business Consulting LLP in this area and through the consolidated and calcified synergies over the time accompanies the interested company in this market following the procedures used to obtain "Tax incentives". However, in this scenario analysis through a “Tax Planning”, combined with a “Consulting for Company Investigation & Commercial Information” is a right way to enjoy increased profits.


The strong growth that has invested China from the 70s to the present day is the result of careful economic policies that the central government in Beijing has outlined with specific strategies in every aspect. Part of these policies is to create - Special Economic Zones - useful in attracting foreign capital through tax concessions, economic and logistical. The knowledge of the different areas and the potential associated with them are important variables in the assessment of a new investment in the Chinese market. These areas usually are born in the port cities, in industrial areas, or in regions where have been created particularly active manufacturing technology centres. In these areas, the goods may be unloaded, processed and exported again without any interference by the Customs Authorities of the Country; only in the case where such goods come out from - Special Economic Zone - to enter the Chinese market will be subject to normal customs regulations. The companies that operate there enjoy significant tax benefits. 
Shenzhen, Zhuhai, Shantou, Xiamen and Hainan are the five special areas of China, to which can be added the - Pudong Development Zone - within which there is the - Waigaoqiao Bounded Zone.

The – Special Economic Zones – are divided into:

  • Free Trade Zone.
  • Export Processing Zones.
  • Bounded Zones or Logistics Parks.

In China among - Free Trade Zone (FTZ) - 15 of them are identified, respectively, Dalian, Futian, Guangzhou, Shantou, Yantian, Zhuhai, Fuzhou, Xiangyu, Haikou, Ningbo, Qingdao, Tianjin, Waigaoqiao, Shanghai Municipality, Zhangjiagang.

A sixteenth - Special Economic Zone - and free trade, is that the port Korgas. It is a haven of fresh water that is intended to promote trade with neighbouring Kazakhstan. In order to attract investment and trade, free trade zones offer tax breaks on imports and on the storage of goods. Another type of area is represented by - Export Processing Zones (EPZ). Even though they are still - Special Economic Zones - these areas require specific conditions, such as that the goods in transit undergo machining before being exported again. In China there are many EPZ, typically in the vicinity of the areas of economic and technological development, so called - Export Development Technological Trade Zones - the most important cities of the Country (Beijing, Dalian, etc.).

Despite the different nomenclature of the zones, and the specific conditions required to obtain the benefits, all of these types are united by tax benefits such as exemption from customs duties and indirect taxes on imports of specific types of products, ability to store raw materials and packing imported in customs warehouses, free of duty or export tax when the modified products in the special area are exported outside the territory of the People's Republic.

Companies operating in the high-tech and general investments in foreign capital also benefited from partial exemptions from income tax of the companies (from 15% to a gradual alignment rate only 25% for business income), and could also receive tax refunds (for Direct or Indirect Taxes), calculated on the volume of business and other standards recorded in the special area.

A further category is represented by - Bounded Zones or Logistics Parks - a particular type of EPZ, due to the category of - Industrial Free Zones. 
Originally born as enclaves, they were located near major Chinese cities with the aim of promoting international trade in the Country. This objective was to be achieved through the construction of warehouses in which safeguard and show the goods (which were exempted from the application of barriers to entry), thus allowing access to capital and equipment of foreign companies without which they were to pay duties or other taxes. Adapting particularly the direct exchange of products, then these special areas have taken on the role of the logistics hub of the main multinational companies, consisting in storage of goods in free zones, in simple transformation and distribution of goods. The incentives to businesses operating in - Bounded Zones - generally consist of tax credits and reduced rates, exemption from duties and taxes for import-export transactions and VAT concessions, or the Value Added Tax on the products.

One of the most important - Bounded Zones – in China is - Shanghai Waigaoqiao Free Trade Zone  Located near the north-east wing of the new metropolitan area of Pudong, with an area of 10 square kilometres, it has quickly become home to over 9000 companies from over 70 different countries. Economic transactions that take place ranging from international trade, to export processing, logistics, transfer of goods. In order to operate in the area, foreign companies must form an independent legal entity and obtain a license for the practice of trading.

There are many advantages:

  • Free entry of goods imported from other foreign markets, with exemption from the payment of VAT and customs duties.
  • Ability to perform the processing of goods or their storage and exhibition without any time limit.
  • Ability to market within the area or to sell goods to foreign markets (other than Chinese) without paying VAT or customs duties.
  • Lack of taxes of any kind with respect to equipment, materials and machinery used by businesses located within the - Bounded Zone.
  • Any economic activity and trading activity within the area, is considered presumptively export, with the application of its benefits.

The - Shanghai Waigaoqiao Free Trade Zone - has promoted since 2003, the policy of "going first and trying first", which resulted in an innovation system as a whole, aimed to attract more foreign investment, strengthening the competitiveness of the area, reduce operating costs of the companies that operate there, as well as to improve the development of the three main activities: international trade, export processing and logistics services. All these efforts have led to a rapid and sustained growth in the area shown by the strong increase (on average over 20% per year) of major economic indicators. This allows you to assign to - Shanghai Waigaoqiao Free Trade Zone - an increasingly important role in promoting the development of the new Pudong district, as well as the whole city of Shanghai.

The creation of - Special Areas - which often has generated much criticism for the disproportion of the benefits granted to foreign investors compared to local, allowed Beijing to attract many foreign capitals and at the same time to control and manage growth, evaluating with what ways and to what areas to push the "Country".

In addition to the provisions at the national level, the incentive system is characterized by a varied, differentiated benefits and discounts at different territorial levels, both in the provincial and Municipal Government. These incentives are usually quite attractive and can weigh more than decisive in the choice of the location of the investment.

The incentive programs are subject to frequent updates: the interested companies may apply to the Bright Business Consulting LLP in order to combine and monitor the opportunities that may be available to them. Furthermore, the analysis trough a "Tax Planning", and a "Consulting for the Company Investigation & Commercial Information" represents strong elements of incidence to enjoy higher profits, just in these areas the activities made by Bright Business Consulting LLP is synonymous of "Warranty & Assistance".

Bright Business Consulting LLP, through consolidated and calcified synergies in the "PEE Project", useful to the accompaniment of business is the congenial partner for structuring or consolidating the business.

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