Hetao Shenzhen-Hong Kong Sci-tech Zone to Offer Preferential Tax Policies
China’s State Administration of Taxation, Shenzhen Municipal Finance Bureau, and Shenzhen Municipal Taxation Bureau have recently issued documents to enact preferential tax policies for qualifying companies and Hong Kong residents in the Shenzhen Park of the Hetao Shenzhen-Hong Kong Science and Technology Innovation Cooperation Zone (“Hetao Zone”).
The Hetao Zone, spanning 3.89 square kilometres, consists of two parks. The park in Hong Kong covers 0.87 square kilometres, while the Park in Shenzhen occupies 3.02 square kilometres. Presently, the Hong Kong branch is still undergoing construction.
As outlined in the State Council’s blueprint, the Hetao Zone is a collaborative endeavour between the thriving tech centre, Shenzhen, and Hong Kong. Its objective is to spearhead the high-quality development of the Guangdong-Hong Kong-Macao Greater Bay Area (“GBA”).
Qualifying enterprises can enjoy a reduced corporate income tax (“CIT”) rate of 15 per cent. The standard CIT rate in China is 25 per cent. Prioritising vital domains and sectors in technological advancement, the tax incentive catalogue covers a wide range of fields. These include information science and technology, material science and technology, life science and technology, and scientific and technological service institutions.
As per the policy, Hong Kong residents may qualify for an exemption from paying the portion of their IIT that surpasses the tax liability they would have incurred in Hong Kong. The scope covers comprehensive income, business earnings, and talent subsidy income recognised by local authorities. In addition, the tax incentive applies to Hong Kong residents working in the Shenzhen Park. Unlike the preferential CIT policy, this measure applies uniformly throughout the Shenzhen Park, rather than being restricted to specific zones within it.
While this policy exclusively benefits Hong Kong residents, certain foreign nationals employed in any of the nine mainland cities within the GBA, including Shenzhen, may qualify for an IIT subsidy.
China’s State Council Reviews Measures Aimed at Further Attracting Foreign Investment
China’s State Council convened an executive meeting on 23 February 2024. The meeting addressed the recommendations presented to the National People’s Congress and suggestions from members of the National Committee of the Chinese People’s Political Consultative Conference. The State Council also deliberated measures to enhance endeavours in attracting and leveraging foreign investment.
Specifically, the State Council emphasised the importance of prioritising the stability of foreign investment in this year’s economic agenda. In addition, it underscored the necessity to expand market access, promote fair competition, and facilitate the flow of innovation resources. Further, members urged the continuous development of a market-oriented, legally sound, and globally competitive business environment. It was deemed to be imperative to boost foreign investor confidence in conducting business in China. The quality and depth of trade and investment collaboration should also be enhanced.
During the meeting, the State Council endorsed guidelines for enhancing payment services. The objective is to encourage the adoption of mobile payments as well as cash transactions and other payment means. As a result, elderly and foreign nationals in China can find it easier to navigate the payment process.
On a separate note, members gave the green light for several government documents, including draft regulations concerning consumer rights protection, ecological compensation, and water conservation.
Stamp Duty Exemption for Offshore Trade Introduced in Shanghai Free Trade Zone and Plans to Build International Business Cooperation Zone in Shanghai Unveiled
The Shanghai Pilot Free Trade Zone (“FTZ”), including the Lingang Special Area, will roll out preferential stamp duty policies for offshore trade on a trial basis. On 18 February 2024, China’s Ministry of Finance issued the Circular on the Pilot Implementation of Preferential Stamp Duty Policy on Offshore Trade in China (Shanghai) Pilot Free Trade Zone and Lingang Special Area.
Starting from 1 April 2024 until 31 March 2025, companies registered within the FTZ will not be required to pay stamp duty on contracts for sales and purchases related to offshore trading activities.
Offshore trade denotes an arrangement where goods move directly from the exporting country to the importing country, bypassing intermediary countries. This eliminates the need for processing contracts, payments, insurance, logistical and financial arrangements, and other documentation formalities in the intermediary country.
On a separate front, the Shanghai Municipal People’s Government released the General Development Plan of Eastern Hub International Business Cooperation Zone (“Cooperation Zone”) on 28 February 2024. The plan sets out objectives in 2030 across five key areas encompassing 17 measures. These include enhancing cross-regional exchanges, fostering greater international business engagement, consolidating innovation resources, developing professional service capabilities, and encouraging comprehensive infrastructure development.
Under the plan, goods entering or exiting the Cooperation Zone from overseas or other Cooperation Zones shall be handled in accordance with policies implemented in comprehensive bonded zones. Goods and materials essential for the construction of the Cooperation Zone, along with equipment necessary for its operation, shall undergo list-based management. Goods not on the list will be subject to applicable taxes.
Hong Kong Recognised by European Union (“EU”) for Efforts to Comply with International Tax Standards
Hong Kong has officially been taken off the EU’s tax cooperation watchlist – a move welcomed by the Hong Kong Special Administrative Region (“HKSAR”) Government. This acknowledges the international financial centre’s endeavours to ensure that its foreign-sourced income exemption (“FSIE”) regime fully adheres to the EU’s applicable criteria.
The HKSAR Government views this decision as a testament to Hong Kong’s ongoing efforts in ensuring transparency and compliance in its tax regime. This is essential for fostering international cooperation and upholding global standards. According to the Secretary for Financial Services and the Treasury Christopher Hui: “We are pleased to note that the EU has recognised our efforts in this regard and removed Hong Kong from the watchlist. Hong Kong will continue to comply with international tax standards while maintaining tax competitiveness.”
After Hong Kong was placed on the EU’s watchlist in 2021, the HKSAR Government implemented a new FSIE regime in January 2023. This regime mandates that multinational enterprise entities must meet certain requirements to qualify for tax exemption on foreign-sourced dividends, interest, royalties, and disposal gains on equity interests in Hong Kong.
In a further development, the EU updated its guidance on FSIE regimes in December 2022. It preferred a non-exhaustive definition of disposal gains. Consequently, Hong Kong broadened the scope of disposal gains under its FSIE regime. The expanded regime covers those arising from the sale of all types of assets, including movable and immovable property.
In December 2023, the HKSAR Government enacted the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Ordinance 2023 to refine the FSIE regime to incorporate the above changes. The updated FSIE regime came into force on 1 January 2024.
Chinese Small- and Medium-sized Enterprises (“SMEs”) Show Improved Performance in January
According to the recently released Small and Medium Enterprises Development Index (“Index”), Chinese SMEs experienced a climb in business performance in January. The index comprises various sub-indexes designed to assess the performance and outlook of SMEs. A reading above 100 indicates a positive trend, while a reading below 100 signifies diminished vitality.
SMEs make a significant contribution to the world’s second-largest economy. Small firms represent approximately 80 percent of the global economic powerhouse’s non-government employment.
The Index, derived from a survey of 3,000 SMEs across eight key industries, rose to 89.2 in January, surpassing the previous month’s score of 89 as well as the reading from the same period last year. The surge was attributed to heightened early-year production and increased consumer demand in anticipation of the Spring Festival, as outlined in a report published by the China Association of Small and Medium Enterprises.
Prior to the Spring Festival, a resurgence in domestic demand contributed to a rise in the sub-index for market vitality to 81.2 from 80.8 in January. However, despite the upturn in market demand and sales, SMEs are still grappling with high costs, as highlighted in the report.
The report also highlighted that proactive growth-oriented policies have strengthened companies’ optimism about the future. According to the report, the sub-index gauging SMEs’ confidence in the macroeconomy increased to 98.8 from 98.5 in the preceding month.
Hong Kong Signs Comprehensive Double Taxation Agreement with Croatia
Hong Kong has recently signed a Comprehensive Double Taxation Agreement (“Agreement”) with Croatia. The Agreement is set to take effect after the finalisation of ratification procedures in Hong Kong and Croatia. Upon ratification, the Agreement could come into force from the 2025/6 tax year in Hong Kong, commencing on 1 April 2025 at the earliest. So far, the city has entered into such kind of taxation agreements with 17 EU member states.
This extensive Agreement pertains to both income and capital taxes. Double taxation will be done away with by way of tax credits. Under its provisions, companies based in Hong Kong can claim tax credits for any taxes paid in Croatia, and vice versa for Croatian companies in Hong Kong. However, the amount of credit is subject to a limit equivalent to the amount of Hong Kong profits tax payable on that income. Additionally, Croatian withholding tax rates on dividends, interest, and royalties for Hong Kong residents will be capped at 5%. Further, profits generated by Hong Kong residents from international shipping activities in Croatia will be exempt from taxation by Croatian tax authorities.
According to a government spokesperson, the Agreement with Croatia will nurture deeper economic and trade ties between the two sides. This will offer further impetus for businesses from both sides to participate in trade and investment activities. Hong Kong will continue engaging closely with its trade and investment counterparts to broaden its tax treaty network. The aim is to enhance the city’s position as a global business and investment hub.
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