Latest interpretation on the “Substantive Operation” of enterprises in the encouraged industries of Hainan Free Trade Port
In accordance with the requirements of the General Plan for the Construction of Hainan Free Trade Port (hereinafter referred to as “FTZ”), the Ministry of Finance and the General Administration of Taxation issued the Notice on Preferential Policies on Enterprise Income Tax for Hainan FTZ (Cai Shui [2020] No. 31), which set out the requirements for “Substantial Operation”. In March 2021, the Hainan Provincial Taxation Bureau of the State Administration of Taxation, the Hainan Provincial Department of Finance and the Hainan Provincial Administration of Market Supervision jointly issued the Announcement on Issues Relating to Substantial Operation of Enterprises in Industries Encouraged by the FTZ (No. 1 of 2021, hereinafter referred to as “Announcement”), which set out the principle determination criteria for substantial operation and laid the foundation for the smooth implementation of the early policy arrangements of the FTZ.
To further enhance the certainty of the policy, the Hainan Provincial Taxation Bureau of the State Administration of Taxation, the Hainan Provincial Department of Finance and the Hainan Provincial Administration of Market Supervision jointly issued the Supplementary Announcement on Issues Relating to the Substantial Operation of Enterprises in the Encouraged Industries of Hainan FTZ (hereinafter referred to as the “Supplementary Announcement”) on 27 September 2022. The Supplementary Announcement will be implemented from 1 January 2023 to 31 December 2024.
Compared with the Announcement, the Supplementary Announcement has improved and refined four main areas as following:
- The scope of applicable objects was expanded.
It is clarified that interim measures for the management of the list of high-end and scarce talents enjoying preferential personal income tax policies in Hainan FTZ (issued by Qiongfu [2022] No. 31), which stipulates that the enterprises or units in which high-end and scarce talents enjoying preferential personal income tax policies in Hainan FTZ serve, are employed or operate, also refer to the provisions of the Supplementary Announcement.
- Specific assessment criteria have been improved.
The criteria for determining the “production and operation”, “personnel” and “accounts” have been further improved.
- “Production and operation in the FTZ” means that the enterprise has fixed production and operation premises and necessary production and operation equipment and facilities, etc. in the FTZ, and the main production and operation location is in the FTZ, or the institution that implements substantial overall management and control of production and operation is in the FTZ; and the relevant contract is concluded in the name of the enterprise.
- “Personnel in the FTZ” means that the enterprise has employees who meet the needs of production and operation actually working in the FTZ, and the salary of the employees is paid through the bank account opened by the enterprise in the FTZ; depending on the scale of the enterprise and the employees, at least 3 (inclusive) to 30 (inclusive) employees must be working in the FTZ in a tax year. Similarly, at least three (inclusive) to 30 (inclusive) employees must reside in the FTZ for a total of 183 days in a tax year.
- The “accounts in the FTZ” means that the accounting documents, accounting books and financial statements of the enterprise are kept in the FTZ, and the basic deposit accounts and bank accounts for the settlement of main business are opened in the FTZ.
- Negative provisions have been added.
Cases such as not having production and business functions and only undertaking the functions of financial settlement, tax declaration and invoicing for mainland business; cases where the registered address is not the same as the actual business address and the actual business address cannot be contacted or cannot be provided after contact are not substantial operations.
- The requirements for follow-up supervision are clarified.
On the one hand, it optimizes the management of market entities enjoying preferential policies of the FTZ. Enterprises enjoying preferential policies on enterprise income tax in industries encouraged by the FTZ are explicitly required to submit a Substantial Operation Self-Assessment Undertaking Form when handling annual remittance payments, returning rights and responsibilities to market players and promoting tax compliance. On the other hand, a joint verification mechanism for substantive operations and a working mechanism for dispute coordination and resolution will be established to strengthen joint departmental supervision, enhance risk prevention and control, and protect the rights and interests of legally operating market entities.
The supplementary announcement serves to stabilize the expectations of market players and ensure that it not only promotes the high-quality development of market players in the FTZ, but also prevents shell companies from enjoying tax benefits in violation of the law and prevents the emergence of industry-wide and systemic tax risks.
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