Recently, Hainan has been making its presence felt in the court of public opinion. From 1 April this year, Hainan added “guaranteed pick-up” and “buy-now-pick-up” to its duty-free shopping for visitors leaving the island. In other words, goods under 20,000 can be picked up on site and unpacked for use on the island.
In the last two years, from “overseas shopping” to “Hainan shopping“, Hainan has shouted out the goal of building an “international tourism consumption centre”. The tax-free shopping, which receives the return of overseas consumption, can be considered the gold standard of Hainan’s tourism industry.
Hainan is undoubtedly the most special in terms of its taxation system. As a special area under customs supervision – inside and outside the country – Hainan is establishing a different tax system from the mainland – “zero tariff, low tax rate and simple tax system”.
Below, Elitetsgae will summarise the preferential policies on income introduced by the Hainan Free Trade Port.
Corporate income tax
1, the free trade port registered and substantial operation of the encouragement of industrial enterprises to reduce the corporate income tax at 15%
requires the actual management organization to be located in Hainan and to implement substantial overall management and control of production and operation, personnel, accounts, property, etc.
Implement substantial overall management and control of accounts, property, etc.
Including the Guidance Catalogue for Industrial Restructuring (2019 version), the Catalogue of Industries Encouraging Foreign Investment (2019 version) and the Catalogue of Newly Encouraged Industries in Hainan
60% of the total revenue of enterprises from the main business of encouraged industries
15% tax rate for the income of the head/sub-branch offices located in the FTZ only
2. Enterprises in the tourism, modern service and high-tech industries are exempt from corporate income tax on income derived from new overseas direct investment
Business profits of new overseas branches
Dividend income corresponding to the portion of new direct investment in overseas subsidiaries with shareholding exceeding 20%
Minimum tax rate restriction on investee countries
3. One-time pre-tax deduction or accelerated depreciation and amortization of eligible capital expenditure
Applicable to newly acquired fixed assets (excluding immovable property) or intangible assets
No restriction on industry and use of assets, and the threshold of deductible lump sum amount is uniformly increased to RMB 5 million
Personal income tax
For high-end and scarce talents working in Hainan Free Trade Port, the part of their actual personal income tax burden exceeding 15% will be exempted.
including comprehensive income, business income and talent subsidies in Hainan Province
Enjoyed in the annual remittance of Hainan
Simultaneously with the island-wide customs clearance operation, the VAT, consumption tax, vehicle purchase tax and urban construction surcharge will be simplified and the sales tax will be levied at the retail sale of goods and services.
Specific methods of collecting sales tax
Convergence under different tax regimes on and off the island
Implementation by 2035
Reduced corporate income tax at 15% for enterprises outside the negative list that are registered and substantially operating in the FTZ
Individuals who have resided in the Hainan Free Trade Port for a total of 183 days in a tax year shall be subject to a progressive individual income tax rate of 3%, 10% and 15% on their comprehensive and business income derived from within the scope of the Hainan Free Trade Port
Corporate income tax and personal income tax as shared income between the central and local governments
Sales tax and other domestic taxes as local revenue
The preferential tax regime of the Hainan FTZ is believed to attract many enterprises to consider setting up in Hainan, and we suggest that enterprises can start by considering the following:
Strategic positioning of the enterprise: clarifying the direction of development and planning the strategic positioning of the enterprise;
Reasonable planning: fully consider the investment holding structure, business structure operating model, capital liquidity, investment and financing convenience. Follow up on the relevant policy guidelines of Hainan Free Trade Port for high-end and scarce talents, timely adjustment of corporate staffing arrangements and human resource reserves to match the deployment of talents. Establishing a sustainable transaction model through business restructuring and business transaction arrangement sorting and planning to prepare the enterprise for long-term business development and growth;
Financial and tax cost optimisation: appropriate adjustments to the business layout as well as the business model of the enterprise, taking full account of the differences in the taxation system on and off the island. Attention should also be paid to the pricing principles and reasonableness of connected transactions, as well as matching taxation with economic substance;
Landing implementation: Consider in advance the potential difficulties in landing implementation, such as the allocation of resources such as human and material resources, and plan in advance the timetable for landing implementation and the project landing management system.