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China Updates – July 2023

Table of Contents

China Pilots Digital Transformation of SMEs

China’s Ministry of Finance and Ministry of Industry and Information Technology have recently announced that it will be piloting the digital transformation of SMEs in 30 key cities. The trial programme is said to continue through to 2025.

The plan intends to position designated cities as primary facilitators in promoting the digital transformation of SMEs. It aims to give play to municipal governments’ role as knowledge reservoirs with access to a vast pool of information about local industries and companies.

The experimental initiative’s objectives are to:

  • Boost innovation levels
  • Enhance core competitiveness
  • Speed up digital transformation
  • Bolster cooperation in industry chains to strengthen existing synergies

As part of the two-year pilot project, selected cities will receive funding in the form of a one-off lump sum. According to the announcement, other cities could join as latecomers to the programme after 2023.

China Introduces Tariff Exemptions in the Hainan Free Trade Port (“FTP”)

On 29 June, China’s State Council released the Circular on Piloting International Standards and Promoting Institutional Opening-Up in Eligible Free Trade Zones and FTPs (“Circular”). In total, the document contains 33 measures, encompassing six aspects.

According to the Circular, aircraft and ships (including related constituent parts) that temporarily leave China for repairs and re-enter Hainan FTP can enjoy tax exemption. In this context, “aircraft” refers to those operated by aviation companies with the pilot zone as their main operating base. “Ships” refer to those operated by shipping companies with a separate legal personality registered in the pilot zone. The port in the pilot area, i.e., Hainan FTP, must be their port of registry.

In addition, customs duties will be waived for goods that undergo repairs in pilot zones and are subsequently re-shipped out of China. However, goods destined for the domestic market, i.e., not for export, will not be able to benefit from preferential tariff treatment.  

Goods that temporarily enter the pilot area from abroad can qualify for exemption from customs duties, import VAT, and consumption tax.

Eligible goods include:

  • Professional equipment (including software, instruments, equipment, and supplies used for news reporting or filming of films, TV programmes, etc.);
  • Goods used for exhibitions;
  • Commercial samples, advertising films, and recordings;
  • Sporting goods necessary for sports competitions, performances, or training.

The above goods must be re-exported within six months and must not be used for commercial purposes, such as sale or lease, during the period of temporary entry. If an extension is required, procedures shall be followed in accordance with relevant regulations.

China Extends Tax Incentives for New Energy Vehicle (“NEV”) Purchases

China’s Ministry of Finance, State Taxation Administration, and Ministry of Industry and Information Technology have jointly released the Announcement on Extending and Optimising the Purchase Tax Reduction and Exemption Policies for NEVs (“Announcement”). NEVs refer to all-battery energy vehicles, plug-in petrol-electric hybrids, and hydrogen fuel-cell vehicles.

The slew of tax breaks worth 520 billion yuan — the biggest yet for the automotive industry — aims to boost sales in the industry. The rapid expansion of the NEV market continues apace. NEV sales are slated to hit 8.5 units this year. In addition, the annual penetration rate of NEVs is projected to reach 36 per cent.

According to the Announcement, NEVs purchased between 1 January 2024 and 31 December 2025 will be exempt from purchase tax. The amount eligible for tax exemption in respect of each NEV shall not be more than 30,000 yuan. Purchase tax levied on NEVs purchased between 1 January 2026 and 31 December 2027 will be halved. The amount eligible for tax deduction in respect of each NEV shall not be more than 15,000 yuan.

Initially introduced in 2014, the tax breaks had already been extended thrice in 2017, 2020, and 2022. By the end of 2022, the cumulative amount of exempted total purchase tax had exceeded 200 billion yuan. In 2023, the amount is set to surpass 115 billion yuan.

Hong Kong: New Tax Exemption Application Procedure for Charitable Organisations

Hong Kong’s Inland Revenue Department (“IRD”) has introduced a new procedure for applying for tax exemption status for charitable organisations.

Under section 88 of the Inland Revenue Ordinance, a charity is exempt from tax. According to the IRD, an organisation seeking to apply for tax exemption status as a charity should refer to the Tax Guide for Charitable Institutions and Trusts of a Public Character (“Guide”) before submission.

In the Policy Statement on Developing Family Office Businesses in Hong Kong released earlier this year, Hong Kong is to be developed into an international philanthropic centre for family offices and philanthropists, facilitating the deployment of charitable capital. In addition, the application procedure for recognition of tax exemption status of charities is to be streamlined and enhanced.

To this end, the IRD has devised and introduced a new standardised application form. Rather than having to consult different sources, applicants can now find all the relevant information and a checklist of documents required for submission in one single document, i.e., the application from.

Submission requirements remain generally unchanged. Where a takeover or replacement of an existing entity is concerned, however, supplementary information is required. Additionally, an applicant that is a trust should provide a list of members or settlors. Further, applicants are required to furnish a list of activities to be undertaken or already undertaken. This is to ensure that the entity’s activities fall within the definition of “charitable purposes”.

Key Tax Highlights from Annual Meeting Between the Inland Revenue Department (“IRD”) and the Hong Kong Institute of Certified Public Accountants (“HKICPA”)

To foster effective communication with the professional accounting community regarding taxation matters, the IRD conducts annual meetings with the HKICPA. These meetings serve as a platform for exchanging insights and addressing shared concerns.

The minutes of the annual meeting that took place last year have recently been released. It revolved around various tax matters related to profits tax, salaries tax, the Base Erosion and Profit Shifting 2.0 Initiative, stamp duty, and e-filing,

Hong Kong certificate of residence for offshore companies

As the law currently stands under the Companies Ordinance, a non-Hong Kong company with an established place of business in Hong Kong must apply for a business registration certificate with the IRD. Conversely, a non-Hong Kong company without a place of business in Hong Kong is not required to complete business registration.

Whether a non-Hong Kong company has a place of business in Hong Kong is a question of fact. The IRD clarified that it would apply the “management and/or control” test. In addition to taking into account all the relevant facts of the case, the IRD shall consider the following factors:

  • Nature of business
  • Mode of operation
  • Place of business
  • Place of board of directors’ meeting
  • Place where management’s decisions are implemented

Permanent establishment of non-Hong Kong resident persons

The IRD provided guidance on the approach to determining whether a non-Hong Kong resident person in a jurisdiction without a double taxation treaty (“DTA”) has a permanent establishment in Hong Kong.

According to the IRD, Schedule 17G of the Inland Revenue Ordinance sheds light on the above issue. In particular, Part 3 of Schedule 17G enumerates the conditions for a non-DTA territory resident person to have a permanent establishment in Hong Kong. A non-DTA territory resident person refers to “a person who, under the laws of the territory, is liable to tax in the territory by reason of the person’s domicile, residence, place of management or any other criterion of a similar nature…”

The above definition, however, will not apply to a company incorporated in a jurisdiction without a corporate income tax system. In practice, it is common for such a company to be managed or controlled in a different jurisdiction and be liable to taxes in that jurisdiction. If the other jurisdiction is Hong Kong, the company will be deemed a Hong Kong resident person. In this case, it will be unnecessary to ascertain whether the company has a permanent establishment in Hong Kong. Any profits earned by the company from carrying on its trade or business in Hong Kong, whether related to any permanent establishment in Hong Kong, will attract profits tax.

Documents requiring wet-ink signatures

The IRD clarified that transmitting documents via facsimile was generally accepted with the exception of tax returns and certain documentation, as specified on the IRD’s website. Except for specific documents, scanned copies with wet-ink signatures are also acceptable. These include objection letters, written requests for extensions, holdover applications, etc.

A natural person can only affix a wet-ink signing chop if he or she lacks the capability to write. In addition, a witness, i.e., an individual other than the signer’s spouse or a minor, must be present during the signing. The witness must provide his or her personal particulars apart from his or her signature.

China Promotes Cross-Boundary Data Flow Within the Greater Bay Area (“GBA”)

The Cyberspace Administration of China and the Innovation, Technology and Industry Bureau of the Government of the Hong Kong Special Administrative Region have signed the Memorandum of Understanding on Facilitating Cross-Boundary Data Flow within the GBA (“Memorandum”).

The objective of the Memorandum is to establish a regulatory framework governing cross-boundary data transfers within the GBA. This will operate in the wider context of the national outbound data transfer regime. In addition, it aims to support the secure and regulated cross-boundary flow of data within the mega city cluster.

Being the lynchpin of the digital economy, data plays a critical role in driving innovation and supporting the overall development of the GBA. With a view to safeguarding the integrity of important data, such as those concerning public health and safety, the maximisation of structured data exchanges is instrumental in the growth of the digital economy. Furthermore, the Memorandum seeks to facilitate Hong Kong’s further integration into national development strategies.

According to a recent white paper published by the Financial Services Development Council, the international financial centre can leverage its cutting-edge information and communications technology infrastructure to become the GBA’s financial data hub, enabling businesses and institutions on both sides to effortlessly exchange information.

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