Tax Policy Analysis on Goods Circulation within Hainan Free Trade Port

As a frontier of China's opening-up, the Hainan Free Trade Port has consistently aligned with high-standard global economic and trade rules. By leveraging its unique policy advantages and geographical location, it has emerged as a new hotspot for global economic and trade exchanges, offering a vast development space for foreign-invested enterprises.

The full closure operation of the Hainan Free Trade Port is scheduled to be officially launched on December 18, 2025, which undoubtedly marks a significant milestone in its construction. The “Notice on Tax Policies for Goods Entering and Exiting the 'First Line', 'Second Line' and Circulating within the Island of Hainan Free Trade Port” (Cai Guan Shui [2025] No. 12, hereinafter referred to as “Notice 12”) was released on July 18, 2025. As a core component of the post-closure policy framework, it aims to establish a trade pattern characterized by “first-line liberalization, second-line control, and free circulation within the island”. The implementation of this policy system will effectively drive innovations and breakthroughs in areas such as trade in goods and industrial development in the Hainan Free Trade Port, while creating a more attractive business environment for foreign-invested enterprises.

 

1. Key Points of Enterprise Beneficiaries and Relevant Tax Policies

1.1 Definition of Enterprise Beneficiaries

 According to Notice 12, enterprise beneficiaries must be registered in the Hainan Free Trade Port and hold independent legal person qualifications. The “Measures for the Recognition and Administration of Beneficiary Subjects of 'Zero Tariff' Imported Goods in Hainan Free Trade Port (Trial)”, issued by the People's Government of Hainan Province, further clarifies that such enterprises may apply for beneficiary qualification only if they are not included in the list of abnormal business operations, the list of customs dishonest enterprises, or the list of seriously illegal and dishonest enterprises.

Compared with the period before the closure, the scope of enterprise beneficiaries has expanded significantly, covering all types of enterprises with actual import needs across the island. For instance, a foreign-invested manufacturing enterprise that has completed registration in the Hainan Free Trade Port, obtained independent legal person qualifications, and is not included in the aforementioned abnormal or dishonest lists meets the basic conditions for applying to be a beneficiary. Currently, these regulations provide a basic framework for enterprises to enjoy policy benefits, but it is worth mentioning that the dynamic adjustment mechanism for the list of enterprise beneficiaries remains unrefined. While the People's Government of Hainan Province is responsible for determining and adjusting the list, it has not clarified the triggering conditions, frequency, or specific procedures for such adjustments, nor has it specified the channels through which enterprises can obtain information on list changes. These details are yet to be clarified. If new documents and detailed guidelines are not issued promptly, enterprises may face compliance risks in their operations due to their inability to promptly ascertain their own beneficiary qualification status, which would dampen their enthusiasm for participating in the development of the free trade port.

1.2 “First Line” Liberalized Tariff-free Import Policy

 Notice 12 stipulates that, except for goods explicitly ineligible for duty exemption under laws, regulations and relevant provisions, and goods prohibited from import by the state, goods entering the Hainan Free Trade Port shall be exempt from import duties, import VAT and consumption tax.

For enterprise beneficiaries, the liberalization of tariff-free imports at the “first line” means they can obtain raw materials, equipment and other items needed for production and operation at lower costs. For instance, a foreign-invested automobile manufacturer importing production equipment through the “first line” can be exempt from import duties, import VAT and consumption tax, thereby reducing initial investment.

It should be noted that the specific scope of the catalog of imported taxable goods remains incompletely clarified. Although the Ministry of Finance, General Administration of Customs, State Taxation Administration, together with relevant departments, have explicitly implemented catalog management, they have not released a complete list of such goods. This information is yet to be clarified through new documents and detailed guidelines promptly.  Otherwise, enterprises will find it difficult to plan accurately when importing via the “first line”, increasing uncertainty in cost budgeting. This is especially relevant for emerging industries reliant on imported raw materials or components, where ambiguous tax treatment may delay investment decisions.

1.3 Rules for Circulation of “Zero Tariff” Goods Among Enterprises on the Island

 Within the Hainan Free Trade Port, when “zero tariff” goods and their processed products circulate among eligible enterprise beneficiaries, Notice 12 clearly stipulates that they are exempt from reimbursing import duties, import VAT and consumption tax, and only need to pay domestic VAT and consumption tax in accordance with regulations. For example, foreign-invested food processing enterprise A (an enterprise beneficiary) purchases high-quality imported wines from foreign-invested food material supplier B, which is also an enterprise beneficiary. In this transaction, there is no need to reimburse relevant import taxes, and only domestic VAT and consumption tax need to be paid in accordance with regulations, thus reducing procurement costs.

When an enterprise beneficiary circulates “zero tariff” goods and their processed products to non-beneficiary enterprises or individuals on the island, it shall, with reference to the provisions on goods entering the mainland through the “second line”, reimburse import duties, import VAT and consumption tax based on imported materials, while also paying domestic VAT and consumption tax in accordance with regulations. For instance, a foreign-invested high-end electronic product retail enterprise (an enterprise beneficiary) selling zero-tariff imported smart watches to ordinary consumers (individuals) on the island shall reimburse the corresponding taxes based on the imported materials.

While the above principles are straightforward and clear, in complex trade relations or multi-party cooperation, the division of responsibilities for tax treatment lacks clear guidelines.  If enterprise beneficiary A sells “zero tariff” goods to enterprise beneficiary B, and B processes them and resells them to enterprise beneficiary C, how should the responsibilities of each party be defined in case of tax disputes? If such details are not clarified through new documents and detailed guidelines promptly, enterprises will have concerns regarding multi-party cooperation and may reduce collaboration due to fears of disputes arising from unclear responsibilities, which would hinder the efficiency of market circulation.

1.4 Tax Administration for Entry into the Mainland through the “Second Line”

 For “zero tariff” goods and their processed products entering the mainland through the “second line”, enterprise beneficiaries shall reimburse import duties, import VAT and consumption tax based on imported materials when going through relevant formalities with the customs.

For example, a foreign-invested garment production enterprise (an enterprise beneficiary) selling garments made of zero-tariff imported fabrics on the island to the mainland shall reimburse import duties, import VAT and consumption tax in accordance with regulations. If import taxes have been paid or reimbursed in the “first line” import or intra-island circulation links, the corresponding import taxes shall not be reimbursed in this link; if domestic VAT has been paid in the intra-island circulation link, import VAT shall not be reimbursed in this link. Goods for which all import taxes have been paid or reimbursed shall be managed in accordance with domestic circulation regulations, and domestic VAT and consumption tax shall be levied in accordance with regulations.

1.5 Tax Policies Related to Processing Value Addition

 Notwithstanding the general rule for the “Second Line”,  For enterprises in encouraged industries in the Hainan Free Trade Port (applicable to foreign-invested enterprises that meet the conditions), when the processing value-added of goods containing imported materials produced by them on the island exceeds 30% (inclusive), they can be exempt from import duties when entering the mainland through the “second line”, and only need to pay import VAT and consumption tax in accordance with regulations.

The calculation of the processing value-added rate follows the core formula: [(domestic sales price of goods - Σ price of imported materials - Σ price of domestically purchased materials) / (Σ price of imported materials + Σ price of domestically purchased materials)] × 100% ≥ 30%. Among them, the domestic sales price of goods is determined based on the transaction price for sale to the mainland, the price of imported materials includes the imported transaction price and related expenses before unloading at the place of entry, and the price of domestically purchased materials is based on the factory price and does not include domestic VAT.

For example, a foreign-invested high-end electronic equipment manufacturing enterprise imports key components such as chips from abroad (the price of imported materials is 5 million yuan), purchases supporting materials on the island (the price of domestically purchased materials is 2 million yuan), processes them and sells them to the mainland at a price of 10 million yuan. The processing value-added rate is [(1000-500-200) ÷ (500 + 200)] × 100% ≈ 42.86%, which exceeds the 30% standard and therefore the enterprise can enjoy the tariff exemption.

Notice 12 clearly states that the specific administrative measures and calculation formulas for processing value-added shall be formulated separately by the General Administration of Customs. The “Interim Measures of the General Administration of Customs of the People's Republic of China for the Administration of Tax Collection on Goods Enjoying Tariff Exemption for Processing Value-added in Hainan Free Trade Port” issued by the General Administration of Customs mentions that enterprises in encouraged industries refer to enterprises engaged in the production and processing of industrial projects specified in the Catalog of Encouraged Industries in Hainan Free Trade Port. Foreign-invested enterprises need to pay attention to subsequent detailed rules to ensure the accurate calculation of processing value-added.

The identification standards for some key data in the formula are still unclear: how to define the relevant expenses before unloading at the place of entry in the price of imported materials; how to calculate the expenses under different transportation methods and insurance clauses; how to accurately strip VAT from the price of domestically purchased materials; and what specific expenses are included in the factory price, etc.  Such information is yet to be clarified by new documents and detailed guidelines promptly, otherwise it may lead to deviations in enterprises' calculation of processing value-added rates, trigger tax disputes, affect the accurate application of policies, and even cause enterprises to miss preferential treatment or bear additional tax burdens.

 

2. Impact on Foreign-invested Enterprises in Hainan

2.1 Opportunities for Cost Reduction

 The circulation of “zero tariff” goods between enterprise beneficiaries is exempt from reimbursing import taxes, which directly reduces the procurement costs of foreign-invested enterprises. Compared with direct imports from abroad, purchasing zero-tariff raw materials or parts on the island can save import duties, import VAT and consumption tax, thereby reducing production costs. For example, a foreign-invested chemical enterprise purchasing zero-tariff chemical raw materials from an enterprise beneficiary on the island can reduce procurement costs by about 10%-20% compared with importing from abroad (the specific proportion varies depending on the product tariff rate).

The tariff exemption policy for processing value-added provides cost advantages for foreign-invested enterprises to expand into the mainland market. Enterprises can improve product value-added rates by building a complete industrial chain on the island (such as transforming from simple assembly to in-depth processing), and reduce tariff expenses when entering the mainland market.

2.2 Advantages in Market Expansion

 Cost advantages enable foreign-invested enterprises to sell products at more competitive prices in the island market and increase their market share. Leveraging the geographical advantages of the Hainan Free Trade Port, products can expand into surrounding areas such as Southeast Asia. For example, a foreign-invested food enterprise uses zero-tariff imported raw materials to produce characteristic snacks. After opening the market on the island, it exports the products to Southeast Asia through the logistics hub of the free trade port.

Policies promote industrial agglomeration on the island, and foreign-invested enterprises can strengthen cooperation with upstream and downstream enterprise beneficiaries to form an industrial synergy effect. For example, a foreign-invested medical device enterprise cooperates with packaging and logistics enterprises that are enterprise beneficiaries on the island to integrate supply chain resources and reduce overall operating costs.

2.3 Compliance Challenges

 Foreign-invested enterprises need to accurately determine whether they meet the conditions of enterprise beneficiaries and strictly follow the identification standards and procedures. If they enjoy undue tax preferential treatment due to misjudgment, they may face risks such as reimbursing taxes, late fees and administrative penalties. The unclear dynamic adjustment mechanism of the list of enterprise beneficiaries further increases the difficulty for enterprises to judge their own qualifications.

In terms of the circulation of “zero tariff” goods and the calculation of processing value-added, foreign-invested enterprises need to establish a sound financial and tax management system, accurately record information such as the flow of goods and value-added, so as to meet the regulatory requirements of customs and tax authorities. For example, they should track the entire process of procurement, production and sales of “zero tariff” goods through information systems. That said, at current stage the ambiguity in the identification standards of some data in the calculation of the processing value-added rate and the unclear division of responsibilities for tax treatment in complex trade relations have increased the difficulty for enterprise compliance management.

2.4 Types of Foreign-invested Enterprises Suitable for Entering Hainan or Transferring Business

A positive implication of the new policy is that the following types of foreign-invested enterprises are more suitable for entering Hainan or considering transferring their existing Chinese business to Hainan:

High-end manufacturing enterprises usually need to import a large number of advanced equipment and precision parts. The liberalized tariff-free import policy at the “first line” can significantly reduce their equipment procurement and production raw material costs. At the same time, if the processing value-added of their products on the island exceeds 30%, they can be exempt from import duties when entering the mainland through the “second line”. For foreign-invested enterprises in the high-end manufacturing industry where the Chinese mainland is the primary market, this can effectively enhance product competitiveness. For example, foreign-invested high-end electronic equipment manufacturers and new energy vehicle core component manufacturers can set up their production bases in Hainan, which can not only reduce costs by using zero-tariff imports, but also expand into the mainland market with the help of processing value-added policies.

The trade pattern of “first line liberalized, second line controlled” in the Hainan Free Trade Port, as well as the policy of free circulation of “zero tariff” goods among enterprise beneficiaries on the island, provide convenience for international trade and entrepot trade enterprises. Foreign-invested trade enterprises can use Hainan as a regional logistics and trade hub for goods distribution by integrating “zero tariff” resources on the island, and expand into the mainland and Southeast Asian markets. In particular, foreign-invested trade enterprises involving multi-batch and multi-category goods import and export can reduce customs clearance costs and time costs by virtue of Hainan's policy advantages.

For foreign-invested enterprises with a high proportion of imported materials in the production process and high added value in the processing link, such as jewelry processing and precision instrument assembly enterprises, Hainan's processing value-added policy is very attractive. After in-depth processing on the island, products can enjoy tariff exemption when entering the mainland market, which can effectively reduce the overall tax burden. In addition, if such enterprises have processing businesses in other parts of the country, transferring them to Hainan can make full use of the policy benefits and increase profit margins.

Hainan is geographically close to Southeast Asia. The combination of the policy advantages of the free trade port and geographical advantages provides convenience for foreign-invested enterprises to explore the Southeast Asian market. For example, foreign-invested agricultural product processing enterprises and light industry product manufacturing enterprises can use Hainan as a production and export base, reduce production costs by using zero-tariff imported raw materials, and then sell products to Southeast Asia through Hainan's ports and logistics network, while also taking into account the mainland market, realizing “one-place production, two-way expansion”.

 

3. Options for Foreign-invested Enterprises

Establish a special tax team or hire professional consultants to formulate tax strategies in combination with the enterprise's business model. For example, in the procurement link, priority is given to selecting suppliers that are enterprise beneficiaries; in the sales link, differentiated tax treatment plans are formulated according to customer types (enterprise beneficiaries / non-beneficiary subjects / individuals). At the same time, pay close attention to updates of the catalog of imported taxable goods and information related to the adjustment of the list of enterprise beneficiaries.

For processing value-added business, plan production layout and process flow in advance, and improve the value-added rate by optimizing supply chain management. For example, arrange the ratio of imported materials to domestic materials reasonably, and optimize production processes to increase added value. For the ambiguous data identification standards in the calculation of the processing value-added rate, communicate and confirm with the tax authorities in a timely manner.

Reconstruct the on-island supply chain with the help of policy advantages, give priority to establishing cooperative relations with enterprise beneficiaries, and ensure the stability and low cost of raw material supply. For example, a foreign-invested automobile manufacturer signs a long-term supply agreement with parts enterprises that are enterprise beneficiaries on the island. When selecting partners, considering the unclear division of responsibilities for tax treatment in complex trade relations, relevant responsibilities can be clarified in the cooperation agreement.

Consider transferring some production links to the Hainan Free Trade Port, and take advantage of the “zero tariff” policy and free circulation on the island to build an efficient supply chain. For example, a foreign-invested electronics enterprise sets up an assembly center in Hainan, and imported components can then be directly sold on the island or enter the mainland market after processing.

Establish an internal compliance system, conduct regular tax self-inspections, and ensure that import and export business, goods circulation and other links comply with policy regulations. For example, formulate detailed rules for the management of “zero tariff” goods and clarify the responsibilities of various departments. Establish an early risk warning mechanism for unclear information in policies.

Strengthen communication with customs and tax authorities to keep abreast of policy trends and regulatory requirements. Arrange special personnel to connect with regulatory authorities, take the initiative to report enterprise business conditions, and actively cooperate with inspections and verifications. For ambiguous clauses in policies, consult with regulatory authorities in a timely manner to ensure enterprise operations are compliant with regulations.

 

4. Our Views and Suggestions

The tax policy for intra-island circulation constructed by Notice 12 brings many cost advantages and market opportunities for foreign-invested enterprises, and also sets out higher requirements for compliant operations. The definition of enterprise beneficiaries, the “first line” liberalized tariff-free import policy, the rules for circulation of “zero tariff” goods within the island, the tax management for entry into the mainland through the “second line” and the processing value-added policy together constitute a tax system that balances opening-up with supervision; nevertheless, there are still some areas that have not yet been clarified.

Foreign-invested enterprises should seize the development opportunities of the Hainan Free Trade Port, conduct in-depth research and flexibly apply the intra-island circulation tax policies, while paying attention to the subsequent updates of the as-yet-unclarified parts of the policies. If such information is not clarified through new documents and detailed guidelines promptly, it may have an adverse impact on enterprises' operational decisions, compliance management and market cooperation. Specifically, enterprises should take action in the following areas:

1. Dynamically track policy updates, arrange special personnel to regularly consult official documents issued by the Ministry of Finance, the General Administration of Customs, the State Taxation Administration and the People's Government of Hainan Province, especially updates to key aspects such as the catalog of imported taxable goods, the adjustment mechanism of the list of enterprise beneficiaries, and the detailed rules for calculating processing value-added, so as to ensure that policy change information is obtained in a timely manner and enterprise strategies are adjusted accordingly.
2. Proactively participate in policy communication, and through industry associations, chambers of commerce and other organizations, actively provide feedback to regulatory authorities on the ambiguous points and practical difficulties encountered in policy implementation, such as the issue of tax liability division in complex trade relations, so as to promote the clarification and improvement of policy details and strive for clearer policy guidelines for enterprises.
3. Pilot first and validate models. For business areas with clear policies, such as the regular circulation of “zero tariff” goods between enterprise beneficiaries, enterprises can increase investment to quickly scale up business; for areas with ambiguous policies, such as the identification of controversial data in the calculation of processing value-added, small-scale pilots can be carried out first, record the problems and solutions in the actual operation process, and then promote on a large scale after the policies are clarified.
4. Build a flexible compliance system. In view of the uncertainty of policies, enterprises' compliance management systems need to have a certain degree of flexibility. For example, reserve data adjustment interfaces in the financial system to quickly adapt when the calculation standards of processing value-added change; add policy change clauses in contract templates to clarify the sharing method of cost changes caused by policy adjustments, so as to reduce cooperation risks.

Through the above targeted actions, we expect foreign-invested enterprises to fully enjoy the existing policy benefits, effectively cope with the challenges brought by policy uncertainty, achieve steady development in the Hainan Free Trade Port, and grow together with the Free Trade Port.