China’s Free Trade Zones

In the Chinese economy a Free Trade Zone (FTZ) is a kind of Special Economic Zone (SEZ) designed to encourage the foreign investment into China through the easing of certain requirements and obligations on the part of the foreign investor. These Free Trade Zones are located in and around Chinese urban centers and generally are 100-200 square kilometers in size. Since the Shanghai pilot-FTZ was established in 2013, 17 additional FTZs have been established in the following provinces and municipalities throughout China:

Guandong (2015)Fujian (2015)Liaoning (2016)Shanxi (2016)Henan (2016)Hubei (2016)Chongqing (2016)Sichaun (2016)Zhejiang (2016)Hainan (2018)Yunnan (2019)Guangxi (2019)Heilongjiang (2019)Hebei (2019)Shandong (2019)Jiangsu (2019)

This diversity in geographic and economic conditions means that most investors have the option of locating their business in an FTZ regardless of their location in China.

Free Trade Zone Incentives:

The primary purpose of the Chinese Free Trade Zones is to promote economic development by attracting foreign investment into China. Therefore, Chinese FTZs offer the following incentives for foreign investors:

  • Pre-duty/bounded warehouse storage before importing goods into China
  • Streamlined customs clearance
  • Streamlined customs and CIQ registration using bonded warehouses
  • Favorable tax treatment
  • Streamlined company registration
  • Grants and bonuses for certain kinds of FDI
  • Relaxed e-commerce and information technology laws
  • Reduced number of restricted industries
  • Simplification of residency rules for foreigners

Customs & Tax Treatment:

Of the free trade zone incentives, the customs and tax benefits take a central role for companies considering an investment in an FTZ.

The favorable customs treatment of imported goods in FTZs is crucial to their success as centers of international trade. Goods imported directly into China’s FTZ are treated as being outside China in terms of customs duties and clearance. A customs duty is only charged if that good is sold and shipped to a Chinese customer. Furthermore, when importing products, businesses located within an FTZ can enjoy expedited clearance and simplified declaration processes.

Although less uniform in nature than the favorable customs treatment enjoyed in different FTZs, tax breaks remain another important category of incentives. As of 2020, the following tax incentives are available for foreign investors in China’s FTZs depending on their location:

  • 15 percent corporate income Tax rate in specifically designated advanced sectors, 10 percent lower than the standard rate of 25 percent.
  • 15 percent corporate income tax rate for tourism and culture-based businesses
  • 15 percent corporate income tax rate for R&D centers
  • Reduced income tax rate for qualified employees to be competitive with Hong Kong
  • Special tax arraignments for multinationals with offshore operations

Pilot Programs:

The Chinese government has expressed a continued interest in experimented with new ways of continuing to streamline the registration system for Foreign Invested Enterprises (FIE) in different locations, for example:

  • The Shanghai FTZ “Certification-License Separation” pilot program, in which a business seeking a business license is only required to register with the relevant authorities and not formally seek pre-approval, was first rolled out to all 18 of China’s FTZ in December 2019 and is expected to be expanded and introduced in the rest of nation in the latter of half of 2020.
  • In the Qianhai-Shekou area of the Shenzhen FTZ, authorities are piloting a program in which an FIE would be allowed to use its foreign currency equity to invest in Chinese enterprises. This could greatly increase onshore holding companies within China.
  • Expect new forms of digital integration in the company registration process to become commonplace in China’s Free Trade Zones as SEZs like the Shanghai FTZ experiment with moving aspects of company registration online.

One of the goals of the Chinese government is to pilot initiatives to simplify and speed up registration for foreign-invested enterprises in China. However, China’s FTZs appeal as a place to more easily register a business has been diminished over time as many of their original programs, like one-stop application processing, no minimum capital requirements, and the system of negative list registration have been adopted nationwide. Although less pronounced, the nation-wide adoption of successful incentives in FTZ have generally created the perception that they are victims of their own success.

Should I Invest in a FTZ?

Although there are some risks associated with participating in untested incentive programs, overall, these incentives point to an increasingly positive environment for foreign investors within the coming years. The Chinese government has expressed a continued interest in experimented with new ways of further streamlining the registration system for FIE. By locating an investment in China’s FTZs and by taking advantage of these pilot programs that may eventually become national policy, foreign investors could be setting themselves up as first movers in an increasingly liberalized Chinese marketplace in the coming decade. For many foreign investors, locating a business with a Free Trade Zone remains an advantageous choice.