May 2014

Tax Alert - Shanghai Pilot Free Trade zone

China's new wave of economic reform

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On 27 September 2013, the State Council published the General Plan for China (Shanghai) Free Trade Zone (the Plan). The Plan sets out the guiding principles with respect to the general requirements, major tasks and measures, supervisory mechanism, tax policies and further opening up of the service sector in China (Shanghai) Free Trade Zone (the SHFTZ).

Before the establishment of the SHFTZ, Shanghai has already opened a number of customs supervisory zones carrying certain characteristics of a Free Trade Zone (FTZ), such as bonded zone, bonded logistics park, bonded port and export processing zone, etc. Most of these zones facilitate the easing of certain custom barriers on imports and exports of commodities, while an FTZ, which is expected to act like a collective and upgraded version of the aforementioned zones, should be more open to provide a genuine free trade area from different perspectives, e.g., financial and foreign exchange. SHFTZ covers around 28.78 square kilometers geographical area and would have the following four customs supervisory zones located in Pudong:

  1. Shanghai Waigaoqiao Bonded Zone
  2. Shanghai Waigaoqiao Bonded Logistics Park
  3. Yangshan Bonded Port
  4. Shanghai Pudong Airport Comprehensive Bonded Zone

Introduction of the SHFTZ policies to be implemented

The Plan clarifies tasks and measures from the administration, investment, trade, finance and legal perspectives, as well as customs supervisory mechanism and tax policies to be implemented in the SHFTZ. Important aspects of the policies include:

Finance and foreign exchange administration

There are currently barriers to the free flow of capital, which constitute an impediment to free trade in view of the interaction between trade and finance. Numerous multinational companies’ (MNCs) headquarters are attracted to Shanghai due to government support policies and facilities; however, they do not place key capital operations in China because of restrictions on cross border capital flow. The Plan, accordingly, indicates that an independent foreign exchange system will be introduced in the SHFTZ to facilitate more trade and investments. Cross border financing and fund management are also encouraged.

In order to achieve the above goals and objectives, on 2 December 2013, People’s Bank of China (“PBOC”) promulgated Opinions of the People’s Bank of China to Support SHFTZ in Financial Sector (the “PBOC’s 30 opinions”) to promote the reform of foreign exchange and financial sectors in SHFTZ.

Within three months after the issuance of “PBOC’s 30 opinions”, in late February 2014, the People’s Bank of China Shanghai Head Office and State Administration of Foreign Exchange Shanghai Branch further issued implementation rules to clarify the following: (1) the expansion of RMB cross-border use, (2) lifting the ceiling of interest rate for smalldenomination deposits in foreign currencies, (3) resolution on anti-money laundering and anti-terrorism financing, and etc. It is anticipated that more forex rules would be issued within the next 2-4 months to further liberalize the forex treatment in the SHFTZ.

Further opening up of investment industries

The Plan highlights further opening up of investment industries that covers six sectors including finance, shipping, commercial, professional, as well as cultural and social services. Details of part of this policy are listed in the table below.

Simplified investment administrations
Inbound investment

According to the Plan, the following administrative measures will be adopted for investment projects in the SHFTZ.

A Pre-establishment National Treatment (PENT) mechanism will be introduced for foreign investment in the SHFTZ on a pilot basis, which would provide equal treatment for foreign investors during its stages of establishment, acquisition and expansion. On the other hand, the SHFTZ will adopt a “Negative List” to lay out foreign invested activities to which national treatments do not apply, e.g., the restricted and prohibited industries. The PENT should be applied and their related administrations would be simplified, so long as foreign investors do not operate in the “Negative List” sectors.

Outbound investment

Outbound investments will be administrated under the “Registration” mechanism by Shanghai local authorities. The Plan encourages investors to establish companies in the SHFTZ that would engage in outbound equity investment. Further, it supports qualified investors establishing outbound Fund of Funds structures.

Favorable tax policies

Pursuant to the Plan, special tax policies related to income taxes (including Corporate Income Tax (CIT) and Individual Income Tax (IIT)), import-level taxes and export tax refund will be implemented in the SHFTZ to promote investment and trade development. The following table summarizes key features:

Promoting investment – installment plan available for income taxes

Installment plan for IIT related to stock incentives

Enterprises/individual shareholders may be allowed to pay income taxes in installments over a maximum period of five years on appreciation of non-cash assets used as investments.

Installment plan for CIT and IIT related to asset appreciation arising from an asset restructuring transaction

Individuals who receive stock options in the form of share stock or capital contribution from enterprises in the SHFTZ may be allowed to pay related IIT in installments.

Promoting trade – export tax refund, import-level Value-Added Tax (VAT)

Finance lease:

  • Export tax refund

Subsidiaries established in the SHFTZ by finance/financial leasing enterprises incorporated in the SHFTZ (Project Subsidiaries) will be eligible to enjoy the pilot export tax refund policy granted to finance lease businesses.

Finance lease:

  • Import-level VAT

Aircraft with a loading capacity of 25 tons or above purchased by Project Subsidiaries from overseas and leased to domestic airlines can be exempted from import-level VAT.

Qualifying imported machineries and equipments:

  • Customs duty/Import-level VAT/import-level Consumption Tax (CT) exemptions

Machinery and equipment imported by manufacturing enterprises (or service enterprises with manufacturing functions) located in the SHFTZ may be exempted from Customs duty/Import-level VAT/import-level CT.

The Plan mentions modifying trial export tax refund policies for Port of Departure. It also calls for tax policies to facilitate more outbound equity investments and offshore businesses, provided that such activity does not result in shifting profits offshore or erosion of the tax base.

Relaxed customs supervision

To expedite the import process of goods entering into the SHFTZ, the imported goods will be allowed to enter into FTZ prior to getting customs clearance. Relevant procedures for importation and exportation of goods related to international transit shipment and freight deconsolidation are streamlined accordingly. Although subject to certain conditions, the SHFTZ would permit a trading platform for designated areas, which means a direct trading manner on bonded goods would be possible within the SHFTZ.

SHFTZ vs other attractive financial policies

One of most striking policies in SHFTZ is financial innovations. Shenzhen Qianhai, a development zone approved by the State Council in 2012, also published a series of attractive financial policies with a similar focus. For business decision makers, it would be prudent to compare financial policies provided in SHFTZ and Qianhai before selecting a location.


For domestic private investors, the Plan provides policies that encourage entry into the financial sector and outbound investment. For foreign investors, the various policies would offer more options for their current or planned investments in China.

From a trading perspective, the policies of allowing customs declaration after goods entering into the SHFTZ, as well as the permissions for direct trading platforms would be major breakthroughs under the current customs practice in China.

The SHFTZ is an exciting new development in the gradual opening of China’s economy and may have far-reaching impact on investment decisions and business plans in China.


Download the Tax Alert (pdf, 934kb).