China's tax incentives and subsidies: boosting foreign investment

Over the past four decades, China has transformed from a country of near economic isolation into an influential global leader in trading and foreign direct investment (FDI).

According to the International Monetary Fund (IMF), China has been the world’s second-largest economy by nominal GDP and the largest measured at purchasing power parity (PPP) since 2013.

China has consistently unveiled financial measures to attract FDI to foster a competitive business environment against the world’s leading economies. Central and local governments have been rolling out a range of incentives, including preferential subsidies and tax reductions, to offer tremendous support to foreign-invested enterprises (FIEs).

This article highlights the key incentives and preferential policies at national and local levels that will further spur FDI into China.

1. Understanding China’s enterprise income tax and VAT

Enterprise income tax (EIT)

Enterprise income tax, also referred to as corporate income tax (CIT), is levied on all enterprises (except sole proprietorships and partnerships) and organisations that have obtained income within the territory of China.

The EIT Law categorises enterprises into residents and non-resident enterprises, subject to different tax obligations.

• Resident enterprises: enterprises legally incorporated in China or effectively managed in China.
• Non-resident enterprises: enterprises legally established outside China but with institutions or management set up within China, or enterprises with income originating from China without setting up any formal presence in China.

The EIT rate and incentives

Remark 1: Please refer to the identification of high-tech enterprises HERE
Remark 2: Western regions herein include Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Ningxia, Qinghai, Xinjiang, Inner Mongolia, and Guangxi etc.

Calculating EIT payable

Corporate income tax is calculated based on a tax year which is a calendar year from 1 January to 31 December.

For resident enterprises:

Taxable income = Gross income – Non-taxable income – Tax-tempted income – Deductions – Allowable loss carry forwards from previous years

EIT payable = EIT taxable income x EIT rate – Tax exemptions or reductions based on tax incentives

Value-added Tax (VAT)

Value-added tax (VAT) refers to an indirect tax levied on the value-added value generated in the process of taxpayers' production and operation activities.

VAT taxpayers are categorised into two types:

• General taxpayers: enterprises whose sales revenue during a business period of not more than 12 months or four quarters exceeds RMB 5 million, or those who have a sound accounting system. An enterprise shall apply for the qualification of VAT general taxpayers when its annual taxable sales reach or exceed RMB 5 million.
  A newly registered company or company with annual taxable sales not exceeding RMB 5 million can apply for the qualification of the general taxpayer if it has had a proper accounting system and can provide accurate tax information to in-charge tax authorities. The input VAT is deductible from the output VAT for general taxpayers, thereby relieving the taxpayer from VAT payment liabilities.
• Small-scale taxpayers: enterprises whose annual VAT taxable revenue is RMB 5 million or less. An enterprise shall be ratified as a VAT small-scale taxpayer upon registration with no need for a separate application.
  Small-scale taxpayers enjoy a simplified VAT rate of 3%, not offsetting input VAT from output VAT.

VAT rate and incentives

2. Shanghai's headquarters economy

Standing at the forefront of China’s reform and opening-up policy, Shanghai ranks first among the mainland cities regarding the total amount of FDI, regional headquarters and the overall competitiveness. According to the 2020 White Paper on Environment for Foreign Investment in Shanghai, almost 60,000 FIEs in Shanghai have contributed to more than 1/4 of Shanghai’s GDP, 1/3 of its tax revenue, about 2/3 of the total imports and exports trade volume, as well as 1/5 of the city’s total employment.

Against this backdrop, Shanghai has developed a vibrant headquarters economy through its relentless efforts to expand opening-up consistently. The local government issued the revised Regulations to Encourage the Establishment of Regional Headquarters (RHQs) by Multinational Corporations (MNCs) in Shanghai (Hu Fu Gui [2019] No. 31) in 2019 to encourage multinational corporations to establish regional headquarters (RHQs), headquarters institutions (HIs) or “quasi-headquarters”, and research and development (R&D) centers in Shanghai.

Definitions and criteria

Regional headquarters (RHQs) refers to the sole headquarters – which shall be an enterprise with independent legal person status – established by a foreign parent company in Shanghai by investment or authorisation to manage and service functions for enterprises within a region of more than one country.

To be considered RHQs, the FIE shall comply with the following criteria:

1. Have an independent legal person status
2. The total asset of its parent company is no less than USD 200 million
3. Have a minimum registered capital of no less than USD 2 million
4. Carry on HQs’ managing functions authorised by the parent company covering a region of more than one country

Additionally, enterprises that don’t meet the above requirements but still make substantive contributions to the local economic development may still be determined as regional headquarters (RHQs) by the district’s authorities

Headquarters institutions (HIs) or “Quasi” headquarters (Quasi-RHQs) refer to foreign-invested enterprises (including any branches thereof) which, despite not meeting the standards for RHQs, carry on several functions of supporting services of the foreign parent companies, such as management decision-making, capital management, procurement, sales, logistics, settlement, research and development, training, etc. (“Headquarters’ Functions”) within a region of more than one country. HIs may, therefore, be classed as quasi-RHQs.

To be considered HIs, the FIE or its branches shall comply with the following criteria:

1. Have an independent legal person status
2. The total asset of its parent company is no less than USD 100 million
3. Have a minimum registered capital or an allocated capital (to branches) of no less than USD 1 million
4. Carry on HQs’ management functions authorised by the parent company covering a region of more than one country

Incentives and rewards for RHQs and HIs

Start-up subsidy

Enterprises registered in Shanghai or moved to Shanghai after 7 July 2008 and have set up regional headquarters in the form of investment companies with paid-in registered capital of more than USD 30 million and employing more than ten employees will be granted a startup subsidy of RMB 5 million. The subsidy will be paid in three years in three instalments (40%, 30% and 30%), respectively.

Rental subsidy

Recognised RHQs and HIs will be granted a three-year rent subsidy equal to 30% of the total rent, provided that the office space does not exceed 1,000 square meters and that the rent does not exceed RMB 8 per square meter per day, making the total subsidy up to RMB 2.62 million.

Performance rewards

The regional headquarters of multinational corporations that are certified by the Shanghai Municipality after 7 July 2008 and have paid-in registered capital of more than USD 2 million, and an annual turnover of more than RMB 500 million will be entitled to the below incentives:

• For the proportion of annual turnover equal to or greater than RMB 500 million but less than RMB 1 billion, a lump-sum incentive of RMB 5 million will be granted
• For the portion of annual turnover equal to or greater than RMB 1 billion but less than RMB 1.5 billion, a lump-sum incentive of RMB 3 million will be granted
• For the portion of annual turnover equal to or greater than RMB 1.5 billion, a lump-sum incentive of RMB 2 million will be granted

The incentive will be paid over in three instalments, over three years (namely, 40%, 30% and 30%), respectively.

Subsidy for upgrading the level of current regional headquarters

RHQs of MNCs for Asia, the Asia Pacific or broader regions (either newly established in Shanghai after 1 January 2012; or the existing RHQs of MNCs that are upgraded to Asia, Asia Pacific or broader regions after 1 January 2012) can each receive a lump-sum upgrading subsidy of RMB 3 million, providing they meet the following criteria:

• have a paid-in registered capital of more than USD 2 million;
• no less than 50 employees;
• the principal is appointed by the parent company; and
• the main senior executives related to the headquarters function are based in Shanghai.

With distinct advantages of inclusiveness and open-mindedness, Shanghai has been closely following the ever-changing business operation models and the global landscape of MNCs. It has made great breakthroughs in policymaking and implemented concrete measures to increase the freedom and convenience of capital use and facilitate investment, trade, logistics, and R&D, making Shanghai an ideal place for MNCs to establish or relocate their headquarters.

3. How can Hawksford help?

Hawksford is a global service provider of company registration and outsourced corporate services. We have more than a decade's worth of on-the-ground expertise in China. Our 100 multilingual professionals based in five offices can help to successfully guide foreign companies in entering the Chinese market. We can help you understand and navigate the regulatory and tax environment, ensure the suitable structure of your business and take on the burden of administrative tasks, including accounting, tax compliance, corporate governance and HR and payroll administration.

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