The choice of location is a fundamental step in establishment planning for foreign direct investment into China. Apart from broad geographic locations, investors should also take into account benefits offered by different development and trade zones. The China (Shanghai) Free Trade Zones (中国(上海)自由贸易区, “Shanghai FTZs”) have been established since 2013 and with the more liberalized measures, they have attracted many foreign investors to set up businesses in Shanghai FTZs with a view to gain access to the mainland China market. Shanghai FTZs comprise Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area and Pudong Airport Comprehensive Free Trade Zone.
In recent years, much attention has been drawn to the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (前海深港现代服务业合作区, “Qianhai”) which is located in the city of Shenzhen close to the Pearl River Delta and near to Hong Kong.
In this Update, we will discuss some of the key features in the two trade zones to assist investors to decide which zone may be more suitable for entry of their investments into China.
Qianhai encourages the service industries including modern logistics, information service, technology service, modern financing and creative industry. Its main trading activities include international purchasing, distribution, entrepôt trade and corresponding services such as finance, insurance and shipping. It has attracted the largest internet company in Asia, Tencent Holdings, to set up internet finance companies and develop e-commerce business in Qianhai.
Since the establishment of Shanghai FTZs, the government is hoping that Shanghai will become an international finance centre by 2020. Shanghai FTZs have also encouraged other industries such as shipping, commercial, trade and professional services. The first wholly foreign-owned medical institution, the first wholly foreign-owned shipping management, the first wholly foreign-owned certification company to adopt international food safety standards and the first reinsurance broker company in China are all incorporated in Shanghai FTZs. As financial leasing companies are allowed to carry on domestic and international leasing businesses and also commercial factoring business in China, the financial leasing industry is booming in Shanghai FTZs.
It is generally accepted that a wholly foreign-owned enterprise (“WFOE”) is the fastest and preferred option for a foreign investor to enter the mainland China market as the foreign investor will have the sole control of the business without the need to find a Chinese partner. The procedure to set up a WFOE in Shanghai FTZs and Qianhai are substantially the same. While there is no requirement on a minimum share capital for most businesses in Shanghai FTZs, foreign investors are required to incorporate their companies with a minimum investment of RMB5,000,000 in Qianhai. However, the Qianhai investors are not required to pay up the minimum share capital upon incorporation. Instead, they may specify in the Articles of Association the time period to pay the share capital amount in full for example in 10 to 30 years.
It is also worth noting that a Hong Kong company is exempted from the minimum capital requirement in Qianhai. A foreign investor may therefore wish to first incorporate a company in Hong Kong, and use it to set up a WFOE in Qianhai for more flexibility.
A virtual address is not acceptable in both Shanghai FTZs and Qianhai. However, to register a WFOE in Qianhai, the investor can choose to rent an office anywhere in Shenzhen and only have a registered correspondence address in Qianhai.
For non-Mainland residents working in Qianhai, eligible high-end talents may enjoy an individual tax rate of 15%. However, in Shanghai FTZs, the individual tax rate can be up to 45% depending on the taxable income.
Also, in Qianhai, eligible companies which are in the encouraged industries (i.e. modern logistics, information service, technology service and creative industry) may enjoy a preferential corporate income tax rate of 15%. The standard corporate income tax rate in Shanghai FTZs is 25%.
For an insurer which is registered in Qianhai, income earned from providing international shipping insurance to businesses in Qianhai may be exempted from corporate income tax.
Both Shanghai FTZs and Qianhai have simplified and expedited clearance of overseas shipment so as to attract companies in the logistics industries to set up their regional hubs in China. Overseas cargoes are free to enter the two trade zones first and are only required to conduct customs clearance at a later stage.
In order to promote a paperless environment, electronic filing management has been installed for import and export of cargoes in Qianhai. There is also an online logistics public information service platform for customs clearance to further expedite the clearance process.
Companies in Qianhai can raise financing by borrowing in renminbi from banks operating renminbi businesses in Hong Kong but the purpose of the loan must be used for the construction and development in Qianhai. The cross-border loans cannot be used for speculative purpose such as investing in securities and other financial derivatives etc.
With effect from July 2018, any Hong Kong, Taiwan or Macau resident working in the mainland China will no longer need to secure a work permit. Since November 2017, any Hong Kong, Taiwan or Macau resident working in the mainland China will be granted the same status as local workers when contributing to / withdrawing from the Housing Provident Fund and be eligible to apply for a housing loan from the Fund.
While many of the preferential treatments and policies in Shanghai FTZs and Qianhai mirror each other, the two trade zones target different industries. Also, Qianhai aims to provide a closer collaboration between Hong Kong and mainland China particularity in the innovation industries. Foreign investors should always consider using a Hong Kong registered company as the investment vehicle in order to enjoy the preferential treatments and other benefits offered to Hong Kong incorporated companies (such as benefits under the Arrangement between the Mainland of China and Hong Kong SAR for the Avoidance of Double Taxation and the treaty benefit for dividends received from China etc).
If you have any questions on the above or other issues under the PRC laws, experienced lawyers in our China Business Department will be happy to assist.