The Shanghai Free Trade Zone (SFTZ)
In September 2013, the Shanghai Free Trade Zone (SFTZ) was officially launched as a pilot zone for China’s opening-up reforms. These are however in accordance with a current national plan which aims to reform the economy into less export-oriented. SFTZ offers more liberal laws and regulations concerning shipping and logistics, commercial trade, professional services such as law and construction, culture and entertainment, and social services including education and healthcare, with the purpose of their later nationwide expansion if successful. New or changed policies are still being implemented, therefore the ‘rules of the game’ for the companies presented in the zone might be sometimes vague and confusing. This report aims to bring a better understanding of SFTZ functioning. Not only formal but also real operation of it will be offered. Moreover, the advantages of SFTZ and their main beneficiaries will be discussed.
- What is SFTZ?
SFTZ aims to generate a regulatory environment for cross-border investment and trading. More than a tariff-free area, it is mainly used as a testing area for various investment, trade, finance, administration, and legal changes. The introduction of the reforms happens over a three-year period, after which the changes should be expanded into Mainland China. This September (2016), the first three-year round will end. However, what will happen next remains an open question. SFTZ and the other new free trade zones may live on with the unique policies in place or the same or similar policies as the ones in SFTZ might be expanded outside the zones. Currently, the negative list approach and faster company registration are already being gradually implemented over the country.
*More than 16200 companies were registered in the zone: less than 17% were foreign investors, originating mainly from Hong Kong, the EU, and the USA.
The space in the zone is limited however, originally 4 bonded zones were recently expanded. Now the zone covers 120 square kilometers and as for now is composed of seven existing bonded zones:
· Waigaoqiao Free Trade Zone and Waigaoqiao Free Trade Logistics Park: first free trade zone in China
· Yangshan Free Trade Port Area: deep-water port, the major component of Shanghai Port
· Pudong Airport Comprehensive Free Trade Zone: west to Shanghai Pudong International Airport
· Lujiazui Finance and Trade Development Zone: a financial services hub
· Jinqiao Economic and Technological Development Zone: an advanced manufacturing and manufacturer services area
· Zhangjiang High-tech Industrial Development Zone: an area specializing in high-tech manufacturing and medical services
2. Advantages of SFTZ
The main purpose of SFTZ is to offer conditions, which are more advantageous for domestic as well as foreign investors. Following are the main benefits offered within the zone. Moreover, the zone offers also Visa benefits for individuals: Foreigners working in the zone can apply for a private affairs residence permit of up to 5 years. Those who have worked for three consecutive years can apply for a 2-year work residence permit.
Current practice outside the zone: A so-called Positive list is employed outside the zone. This identifies specific activities allowed to be conducted by foreign investors within China’s territory. All other activities are forbidden to be run by foreign investors. Positive list, in other words, Foreign Investment Guidance Catalogue, identifies the "Encouraged", "Restricted" and "Permitted" sectors in China. Preferential policies may be applied to foreign investment in encouraged sectors, pre-approval is required in restricted sectors and prohibited sectors are closed to foreign investment.
A negative list works another way around: it identifies particular activities; that foreign investors are not allowed to conduct within the zone. All the other activities are allowed. The list still distinguishes between prohibited and restricted activities. The allowed companies engaged in the activities not on the list will be required to arrange only a “Registration” (filing) with the Shanghai municipal government (for more see Section below), no prior government “Approval” will be required. Foreign investors can invest in sectors not on the “Negative List” without any restriction or joint venture requirements. Foreign enterprises only need to register their projects, without the need to apply for approval. Thus, investments by foreign entities are treated the same as investments by domestic entities.
The length of the approval has been shortened to less than a week (import and export license takes 2 weeks). The steps necessary for the business registration have been eased: Only a one-stop filing and registration procedure is required instead of an approval process. Next, the steps can be completed by the company on its own.
Relaxed minimum capital requirements for companies in particular industries as for instance financial leasing companies. Annual reporting replaces the annual inspection system takes a place in SFTZ. Moreover, it is possible to have a virtual office in the SFTZ. This is not permitted in the rest of China.
Financial Advantages Free Trade Accounts (FTAs) Companies within SFTZ, will be allowed to freely transfer funds between FTAs and accounts outside Mainland China as well as in-between FTAs. Transactions with the accounts within Mainland China are administered as cross-border. Moreover, companies operating in the SFTZ would be allowed to use FTAs to borrow offshore loans (foreign debt) up to twice the company’s capital (paid-in capital + capital reserves) from outside Mainland China.
There are no preferential taxes in SFTZ, yet some tax incentives are offered, mainly for the acceleration of the procedures:
· CIT In an asset restructuring transaction, for the appreciation of non-cash assets used as investments, the related income taxes may be allowed to be paid in installments over a period of up to five years.
· IIT Income taxes, enterprise/individual shareholders may be allowed to pay the taxes in installments over a period of up to five years if this is associated with an asset restructuring transaction, for the appreciation of non-cash assets used as investments. High-end talent and talent in short of supply who receive stock options may be allowed to pay related IIT in installments.
· VAT Import-level VAT and Consumption Tax will be applicable to goods produced, processed by firms in the SFTZ, and sold to Mainland China. Import level VAT is applicable for certain aircraft leased to domestic airlines.
· Custom duties Exemptions on customs duty, import-level VAT, or consumption tax may apply for machinery and equipment imported by manufacturing enterprises in the SFTZ.
· Refunding: Export taxes may be refundable for finance leasing enterprises or project finance leasing subsidiaries incorporated in the zone
Source : https://mzv.gov.cz/
Updated on: Monday, February 12th, 2024