On June 6 2022, China’s central government released a master plan for the development of Guangzhou’s Nansha district. This joins the 2021 master plans for the Hengqin and Qianhai cooperation zones in Zhuhai and Shenzhen respectively. China also ratified the OECD’s multilateral instrument (MLI).
For each area, specific sectors are identified for encouragement. For Nansha, incentives will focus on fundamental/applied research, marine science and technology, intelligent manufacturing, and digital industries. Supportive measures for start-ups and outbound investing enterprises will also be put in place.
Incentives include a reduced corporate income tax (CIT) rate of 15% (China’s standard rate is 25%) for encouraged industries, which will be set out in a catalogue. The preferential CIT rate only applies to enterprises located in Nanshawan, the Qingsheng hub and the Nansha hub, which are the pioneer zones for the development of Nansha.
High-tech enterprises will also enjoy a longer tax loss carry-forward period. The 10-year limitation is expected to be extended.
Preferential individual income tax (IIT) treatment will be provided to Hong Kong and Macau residents working in Nansha, bringing their after-tax income in line with what they would obtain after tax in the low-tax jurisdictions of Hong Kong and Macau.
While this preferential IIT treatment is solely directed at Hong Kong and Macau staff, the IIT incentive policy for foreign talent from all countries remains in effect. In other words, eligible foreign staff can benefit from a maximum IIT burden of 15%.
In late May, China deposited its instrument of approval for the BEPS 1.0 MLI with the OECD. The MLI will enter into force for China from September 1 2022. Preliminary research shows that more than 40 Chinese tax treaties will be affected.
Significant changes include:
The insertion of the principal purpose test into updated double taxation agreements (DTAs);
The replacement of the corporate tax resident tiebreaker test in some updated DTAs; and
A modernisation of the mutual agreement procedure and transfer pricing articles in certain older DTAs.
A limited number of treaties have also had updates to their dividends and capital gains articles.
China opted not to update its treaties to reflect the changes to the definition of a permanent establishment in Action 7.
In addition to updating existing DTAs via the MLI, China has incorporated BEPS changes in its new DTAs signed with Angola, the Republic of Congo and Rwanda. These DTAs will come into force on January 1 2023.
Businesses should monitor these DTA updates to ensure access to treaty relief for their cross-border activities with China.
At the same time as the Chinese government has been enhancing the tax environment for cross-border activities, progress is being made with the placing of some existing taxes (currently based on regulations) on a legislative basis.
The Chinese government on July 14 2022 announced that the draft bills for the VAT law and customs tariff law will be submitted to the National People’s Congress for deliberation within 2022. Businesses should also pay attention to this.