China to launch a pilot free trade zone in Shanghai

Tax Update


Foreign investors in China can look forward to further reforms and liberalization of certain industry sectors in China's newly approved pilot free trade zone in Shanghai (中国(上海)自由贸易试验区) ("FTPZ").

China's State Council passed the Overall Plan for China (Shanghai) Free Trade Pilot Zone ("FTPZ Plan") on 3 July 2013. As investors anxiously waited, the State Council formally approved the establishment of the China (Shanghai) Free Trade Pilot Zone on 22 August 2013.

The FTPZ is expected to cover an area of 28.78 square kilometres along the eastern coast of Pudong. It will include following four existing customs supervised areas:

  • Waigaoqiao Free Trade Zone
  • Waigaoqiao Bonded Logistics Park
  • Yangshan Free Trade Port Area, and
  • Pudong Airport Free Trade Zone.

Currently these four areas are collectively known as the "Shanghai Integrated Bonded Free Trade Zone" ("上海综合保税区”)1.

According to the Ministry of Commerce ("MOFCOM"), the government organ that announced the news of the FTPZ's formal approval, the FTPZ is aimed at accelerating the transformation of government functions, further opening up the service and finance industries, and laying the groundwork for greater nationwide reforms and a restructured Chinese economy.

Details of the FTPZ Plan and the relevant implementation regulations have not been published. The full text of the FTPZ Plan is expected to be released at the end of September to coincide with the formal opening ceremony of the FTPZ. However, based on information from various public sources, the FTPZ Plan may include the following major developments and reforms.

Simplification of foreign investment administration

Foreign investment is subject to the Foreign Investment Industries Catalogue and approval of the authorities. The approval process for foreign investment in China is not straightforward and notoriously time-consuming. In the FTPZ, the foreign investment approval process will be liberalized (i.e., replaced with a filing formality rather than approval requirement) and foreign investment will, in principle, be allowed in all sectors unless prohibited or restricted in a more investor-friendly "negative list". Such list has not been issued but is expected to be much shorter than the Foreign Investment Industries Catalogue. For example, it has been reported that the credit investigation sector may be opened up to foreign investment in the FTPZ. Ultimately, foreign investment into China will be granted similar if not equal treatment as domestic enterprises.

The changes in the approval process and exempting companies in the FTPZ from application of the Foreign Investment Industries Catalogue is in apparent conflict with current PRC foreign investment laws. To address this conflict, on 30 August 2013, the Standing Committee of the National People's Congress issued its Decision on Authorizing the State Council to Temporarily Adjust the Administrative Examination and Approval under Relevant Laws in China (Shanghai) Free Trade Pilot Zone ("Decision") effective starting October 1, 2013. The Decision, in essence, blesses the changes that are to take place in the FTPZ. That is, the Decision confirms that, on a trial basis in the FTPZ for three years, the filing formality will replace eleven MOFCOM approvals that are now required for the establishment or modification of foreign invested enterprises so long as such foreign investments do not fall within the special administration in connection with the "negative list".

Facilitation of customs supervision

In existing bonded zones, the entry and exit of goods are under customs supervision. In contrast, the FTPZ is intended to be a real free trade zone, whereby customs recordal for goods shipped from overseas into the FTPZ will no longer be required. Customs supervision will also be streamlined. Currently, Chinese Customs carry out batch supervision of goods. This supervision method will be replaced with one that is centralized, categorized, and electronic.

Competitive tax policies

There have been reports of potential preferential tax policies for the FTPZ but no formal details have not been revealed. The Shanghai government is reportedly striving to implement a lower preferential enterprise income rate applicable to qualified enterprises within the FTPZ (various sources have reported a rate of 15%).

Other favourable tax policies within the FTPZ in discussion include the payment of income taxes on proceeds generated from outbound investment by instalments, and lower tax rates for offshore trading and financing.

Financial reform

Various sources indicate that the FTPZ may experiment with RMB convertibility under the capital account to eventually allow the full convertibility of the RMB. The FTPZ is intended to be a testing ground for the internationalization of the RMB.
Financial reform may also include the following:

  • The interest rate of the financial market may be liberalized,
  • Foreign banks may be able to enjoy national treatment in the FTPZ by establishing wholly-owned subsidiaries and engaging in a full range of financial businesses,
  • Overseas enterprises would gradually be allowed to participate in futures trading; and
    The financial leasing business would be encouraged with tax incentives.

The liberalization of policies regarding customs supervision, taxation, capital flow and market access have the potential to significantly cut down operating costs for multinational companies and may be conducive to efficient internal resource allocation. Companies may view this development as an opportunity to restructure operations in China and consider situating company headquarters in China. We will monitor any new developments related to the FTPZ that are expected in the next few months.

1 Map of Shanghai Integrated Bonded Free Trade Zone