Hainan is China’s largest special economic zone (SEZ), the largest pilot free trade zone and the only free trade port with Chinese characteristics in the world. The Hainan Free Trade Port (FTP) policy initiative was launched in 2020 by the Chinese government in particular to attract foreign investment, boost domestic consumption and create a globally competitive business environment. 

On June 30th, 2020, the Ministry of Finance (MOF) and the State Taxation Administration (STA) released the Cai Shui [2020] No.31 and the Cai Shui [2020] No.32, which contain preferential tax policies for both individuals and enterprises in the Hainan FTP. In the following article we will take a closer look at them.

Individual Income Tax (IIT) preferential rate

High-end talents and urgently-needed talents who work in Hainan Free Trade Port can enjoy a maximum IIT rate of 15%.

To be eligible, the following conditions must be met:

• Have accumulated 183 days or more of residence in the Hainan Free Trade Port within a tax year.

• Have been identified as talents by the talent management departments at all levels in Hainan Province or having an income of over RMB 300,000 within a tax year in the Hainan Free Trade Port (with dynamic adjustments implemented by Hainan Province based on the economic and social development situation).

  
  

Corporate Income Tax (CIT) preferential rate

Encouraged industrial enterprises that are registered in Hainan Free Trade Port and have a practical operational record are entitled to a reduced corporate tax rate of 15%.

How to determine if an enterprise is an encouraged industrial enterprise:

• The main business of the enterprise is on the list of encouraged industries in the Hainan Free Trade Port.

• The income from the main business of the enterprise must constitute 60 percent or more of its total income.

CIT Exemption

In addition, enterprises from tourism, modern services, and high-tech industries that have established overseas direct investment in Hainan Free Trade Port before 2025 are exempt from corporate income tax.

However, the overseas income of these enterprises must satisfy the following conditions:

• The overseas income is the operational revenue of the newly established overseas branches, or dividend income corresponding to the newly increased overseas direct investment obtained from the overseas subsidiaries in which more than 20 per cent (inclusive) of equity is held by the parent company.

• The statutory CIT rate of the invested country or region is not less than 5 percent.

  
  

One-off pre-tax deduction or accelerated depreciation and amortization for newly purchased assets

For enterprises established in Hainan Free Trade Port, the newly acquired (including self-built and self-developed) fixed assets or intangible assets with a unit value not exceeding RMB 5 million (US$775,000) may be allowed to be included in the current period's cost and expenses and deducted when calculating taxable income, without depreciation and amortization being calculated annually. 

For newly acquired (including self-built and self-developed) fixed assets or intangible assets with a unit value exceeding RMB 5 million (US$775,000), the depreciation and amortization period can be shortened, or accelerated depreciation and amortization methods can be adopted. Fixed assets refer to fixed assets other than buildings and structures.

In conclusion, the Hainan Free Trade Port offers a range of attractive tax incentives for foreign investors and businesses seeking to establish a presence in China. By reducing corporate tax rates, exempting select industries from corporate income tax, and offering tax benefits for high-end talent, Hainan Province aims to create a favorable environment for economic development and growth.

At PHC Advisory, our team is constantly monitoring the most recent incentives, subsidies, and exemptions accessible to businesses in China. Feel free to reach out to us at info@phcadvisory.com to find out more about preferential policies in China that your company could benefit from.