Does Your Business Qualify for China’s Reduced 15% CIT Rate? Defining “Substantial Operations” in Key Development Zones

Eligibility to pay reduced 15 percent corporate income tax in China hinges on whether a company can prove it has “substantial operations” in certain industries within a specific development zone. To help implement the preferential policy, local authorities have released guidelines explaining what exactly the requirements are for substantial operations. Below we compare the different eligibility requirements in the regions implementing this preferential tax policy.

To encourage business development and investment in key industries in China, several areas have implemented a preferential corporate income tax (CIT) rate for eligible companies. This preferential policy, which reduces the CIT burden from 25 percent to 15 percent, is available to companies operating in certain sectors in various development zones in China.

• The Lingang New Area of the Shanghai Free Trade Zone in Shanghai (Lingang New Area);
• The Fujian Pingtan Comprehensive Pilot Zone in Fuzhou, Fujian (Fujian Pingtan);
• The Hengqin-Guangdong-Macao In-Depth Cooperation Zone in Zhuhai, Guangdong (Hengqin Cooperation Zone);
• The Guangzhou Nansha Economic and Technological Development Zone in Guangzhou, Guangdong (Nansha Development Zone);
• The Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone in Shenzhen, Guangdong (Qianhai Cooperation Zone);
• The Hainan Free Trade Port in Hainan (Hainan FTP); and
• China’s Western regions, which include Inner Mongolia, Guangxi, Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Qinghai, Ningxia, and Xinjiang (the “Western regions”). In addition, Xiangxi Tujia and Miao Autonomous Prefecture in Hunan Province, Enshi Tujia and Miao Autonomous Prefecture in Hubei Province, Yanbian Korean Autonomous Prefecture in Jilin Province, and Ganzhou City in Jiangxi Province can also adopt the preferential CIT policy implemented in the Western regions.

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The reduced CIT rate is only applicable to companies that operate within certain encouraged industries, which are specified by each local authority. In addition, the local governments also require companies to have made a certain level of commitment to the area in order to be able to enjoy the policy, which in many means proving that they have “substantial operations” within the respective areas. Over the past few months, more jurisdictions have clarified the scope of what constitutes substantial operations, facilitating the implementation of the preferential policy.

Which industries are eligible for China’s 15 percent CIT rate?

The development zones that currently implement the reduced 15 percent CIT rate only provide this preferential policy to companies that operate within certain encouraged industries in each region.

The different development zones manage the eligible industries through the implementation of local and national encouraged industry lists, which are ostensibly updated periodically.

In addition, the different development zones have slightly different requirements for the type of operations that must be carried out in order for the company to be eligible.

These generally include deriving at least 60 percent of their main business income from one of the industries in the respective encouraged lists and having substantial operations within the area.

The table below summarizes the eligibility requirements for companies to enjoy the reduced 15 percent CIT rate in each of the five development zones.

Definition of substantial operations in China’s development zones

Most of the development zones require companies to have substantial operations within the confines of each region to be eligible for the reduced 15 percent CIT rate.

To facilitate the implementation of the preferential policy, each of the areas has released its

own sets of rules and definitions for what constitutes substantial operations. The definitions are similar but differ slightly in their wording and requirements. The basic definitions of substantial operations in the different development zones are summarized below.

Shanghai Lingang New Area

On June 13, 2023, Shanghai’s municipal monetary and tax authorities released an announcement outlining the scope for the 15 percent CIT rate available to industrial companies that carry out “substantive production or R&D activities” in the Lingang New Area. Under the new scope, which is implemented retroactively from January 1, 2023, carrying out substantive production or R&D activities is defined as: “Having a fixed production and operation site, permanent staff, and matching software and hardware support conditions in Lingang New Area, and carrying out relevant business on this basis.”

Additional explanations are also provided regarding:

1. Fixed production and business premises: The company has a fixed production and operation site and necessary equipment and facilities for production or R&D activities in the Lingang New Area, the main production or R&D activities are located in the Lingang New Area, and any relevant contracts are concluded in the name of this company. Moreover, accounting documents, such as vouchers, accounting books, and financial statements are stored in the Lingang New Area, and the company’s basic deposit account and bank account for the main business settlement are opened in the Lingang New Area.
2. Permanent staff: Employees who meet the needs of the company’s production or R&D activities and who actually work in the Lingang New Area. The wages and salaries of the employees are paid through the bank accounts opened by the company in the Lingang New Area, and the social insurance of more than 50 percent of the employees is paid in the administrative area where the Lingang New Area is located.
3. Software and hardware support conditions: The company has the ownership or right to use the hardware and software assets and actually uses them in the Lingang New Area, and the hardware and software assets must match the production or R&D activities of the company.

Western regions

The Western regions do not have any specific requirements for “substantial” operations in each region in order to be eligible for the reduced CIT rate at this time. However, the company must derive at least 60 percent of its main business income from one of the sectors listed in the Catalog of Encouraged Industries in the Western Region, or one of the national catalogs for encouraged industries.

Fujian Pingtan, Hengqin Cooperation Zone, Nansha New Area, and Qianhai Cooperation Zone

Fujian Pingtan, the Hengqin Cooperation Zone, the Nansha New Area, and the Qianhai Cooperation Zone all define substantial operations in the same way. This is when a resident enterprise is registered in the respective areas, engages in eligible industrial projects (those in the respective encouraged industry lists), and has its “production, operation, personnel, accounts, property, and so on” in the respective areas.

The policy is applicable to both parent companies established in the development zone and branches within the development zone that have been established by non-resident companies outside the zone.

For a branch company to be eligible, it must have production or operational functions, and have operating income, employee remuneration, and total assets that match this production or operational function within the respective development zone.

More specifically, the announcements state that a company is considered to have substantial operations if it meets the following conditions:

• The company’s production and operation are located in the respective areas, meaning that its fixed production and operation site and necessary production and operation equipment and facilities, main production and operation site, or the institution that implements substantial and comprehensive management and control of production and operation is in the respective areas. External contracts must also be concluded in the name of this company.
• The company’s personnel are in the respective areas, meaning that the company has employees who meet the needs of production and operation to actually work in the respective areas, and the wages and salaries of the employees are paid through the bank account opened by the company in the respective areas. In addition, in accordance with the size of the company and the employee situation, the company must have between three and 30 employees that pay social insurance, such as pension, for at least six months in the respective areas in the current tax year.
• The company’s accounting must be conducted in the respective areas, meaning the company’s accounting documents, such as vouchers, books, and financial statements, must be stored in the respective areas, and the basic deposit accounts and bank accounts for the company’s main business settlements must be opened in the respective areas.
• The property that the company owns or has the right to use must be located in the respective areas. That is, the property that the company actually uses must be located or the institution that implements substantial and comprehensive management and control of the property must be located in the respective areas, and this property must match the production and operation of the company.

Note that for the Nansha New Area, the reduced CIT rate is only applicable in the “initial launch areas”, which refers to the Nansha Bay area of the Guangdong Pilot FTZ, the Qingsheng Hub Cluster, and the Nansha Hub Cluster.

Hainan FTP

The Hainan FTP defines substantial operations as when a resident company “has no branch established outside the free trade port, and its production and operation, personnel, accounts, assets, and so on, are located in the FTP”.

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However, if a resident company establishes branches outside the FTP, but it maintains substantial and comprehensive management and control over each branch’s production and operation, personnel, accounts, assets, and so on, then the resident company is still considered to have a substantial operation and is eligible for the policy.

Moreover, if a resident company registered outside the FTP establishes a branch inside it, or a non-resident company establishes an institution or premises in the FTP, then the branch, institution, or premises could be considered to have substantial operations within the FTP – if it meets the following conditions:

• It has production and operation functions; and
• It has operating income, employee remuneration, and total assets that match its production and operation functions.

The different thresholds for achieving substantial operations are similar to that of other regions, namely:

• Have production and operation in FTP: The company has a fixed production and operation site and necessary production and operation equipment and facilities in the FTP, and the main production and operation site is in the FTP or the institution that implements substantial overall management and control over production and operation is in FTP; relevant external contracts are concluded in the name of the company in the FTP.
• Have personnel in the FTP: The company has employees who meet the needs of production and operation and actually work in the FTP, the wages and salaries of employees are paid through the bank accounts opened by the company in the FTP; according to the size of the company and the employee situation, the company has between three and 30 employees living in the FTP for at least 183 days (in total) in a given tax year. If the company has less than 10 employees, then at least three must live in the FTP for 183 days in a tax year; if it has between 10 and 100 employees, at least 30 percent must live in the FTP for 183 days in a tax year; if it has 100 or more employees, then at least 30 employees must live in the FTP for 183 days in a tax year.
• Have accounts in the FTP: The company’s accounting documents, such as corporate accounting vouchers, books, and financial statements, are stored in the FTP, and basic deposit accounts and bank accounts for the company’s main business settlements are opened in the FTP.

Assessing eligibility for the reduced CIT rate

Companies that may be eligible for China’s reduced CIT rates in the different development zones are encouraged to consult the respective regional government documents for the list of permitted industries and specific requirements for the scope of operations.

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As assessing whether or not a company’s operations in a given area are substantial may require a significant amount of auditory work, it is advisable that companies begin to gather information on their operations as soon as possible if they believe they may be eligible for the preferential policy.

In many cases, companies are required to submit a Substantive Operation Self-Assessment Commitment Form, in which companies must indicate whether their operations meet each of the different regions’ eligibility requirements.

Moreover, for companies that are already enjoying the preferential policy, the local tax bureaus will carry out ongoing supervisory work to ensure they continue to meet the eligibility requirements. This may include spot checks of the premises. It is therefore important that companies continue to maintain records of their current operating conditions to ensure that changes to staffing, premises, accounting procedures, production, or other factors do not affect their eligibility for the preferential policy.

This article was originally published on June 6, 2023, and last updated on June 19, 2023.

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