Shenzhen Issues New Preferential Tax Policies in QCZ

With last month’s release of guidelines for the preferential enterprise income tax (“EIT”) in the Qianhai Cooperation Zone (“Guidelines”),[1] this commercial development zone in Shenzhen has again been attracting attention from many enterprises considering how to best establish or restructure their businesses in the China market.

Background

Already, between 2014 and 2020, entities incorporated in Qianhai in certain eligible industries were entitled to a reduced 15% EIT, and in May 2021, the Ministry of Finance and the State Taxation Administration decided to renew the term of the preferential EIT policies for Qianhai to the end of 2025.[2] At the same time, the authorities expanded the scope of eligible industries from the original 21 sectors of 4 major industries to 30 sectors of 5 major industries.[3] In addition, the requirement on the minimum percentage of main business income to account for total income was reduced from 70% to 60%. Finally, the Shenzhen Tax Service of the State Taxation Administration further clarified, in July 2021, that enterprises may determine by themselves whether they qualify for the preferential EIT policies in Qianhai, provided that the enterprises keep all relevant contracts for potential inspection.[4]

However, a couple of critical issues were still not addressed even then, such as the detailed standards for determining eligible industries and the procedure for inspecting and, if necessary, adjusting an eligibility determination. After all, there were cases in the past in which disqualified Qianhai taxpayers were required to make up unpaid EIT, plus pay interest and even fines.

New Guidelines

Now, the Guidelines, issued by the so-called “Authority of Qianhai Shenzhen-Hongkong Modern Service Industry Cooperation Zone of Shenzhen” (“Qianhai Authority”), provide companies with reliable bases to assess their qualification for Qianhai’s preferential EIT policies as well as a clear idea of the procedures they would need to go through in the event there would be any difficulties for tax authorities to recognize their eligibility. Specifically, the Guidelines:

• provide a 28,000-word detailed description for altogether 145 eligible sectors and sub-sectors;
• clarify that the Qianhai Authority will assess and issue opinions where tax authorities have difficulties in determining whether the relevant businesses of taxpayers fall into the scope of eligible sectors;
• specify the procedures and timeline for the Qianhai Authority to assess the businesses and issue opinions; and
• set out the key points based on which the Qianhai Authority will assess the businesses, and list the documents to be submitted by enterprises for the assessment.

Takeaways

Over the last couple of years, China has been enhancing the attractiveness of the Qianhai Cooperation Zone, a key part of Shenzhen and more generally the Guangdong–Hong Kong–Macau Greater Bay Area, including by extending, augmenting and streamlining tax incentives. Some early birds have already made moves to establish businesses in Qianhai, while more players, especially those in the industry sectors most recently allowed to enjoy the preferential tax policies, are expected to settle in Qianhai soon. Furthermore, it would not be surprising if the policy trend continues, with more tax and other incentives implemented in the coming months and years to attract even more businesses to the area.

1. Guidelines for Recognition of Industries Eligible for Qianhai’s Enterprise Income Tax Preferential Policies, released by the Authority of Qianhai Shenzhen-Hongkong Modern Service Industry Cooperation Zone of Shenzhen on 30 April 2022 and effective as of 20 May 2022.
2. Notice regarding Renewing the Preferential Enterprise Income Tax Policies in the Qianhai Shenzhen-Hongkong Modern Service Industry Cooperation Zone (Caishui [2021] No. 30), issued by the Ministry of Finance and the State Taxation Administration on 27 May 2021.
3. The newly added major industry “business services” contains 8 sectors, including exhibitions, international conferences, legal services, credit investigation and rating services, accounting, tax and asset appraisal services, and environment protection services. Two new sectors were added to the major industry “information services”, R&D and services of VR, AR, and AI technologies, and R&D and services of industrial Internet, Internet of vehicles, smart wear, and other information technologies.
4. Operation Guidance for Preferential Enterprise Income Tax Policies of Qianhai Shenzhen-Hongkong Modern Service Industry Cooperation Zone, issued by the Shenzhen Tax Service of the State Taxation Administration on 2 July 2021.