China’s national government offers a tempting variety of financial incentives designed to lure inbound foreign investment, some of which were introduced by this instigator in the article “Investing in China: Tax Incentives”. But, additional incentives offered by provincial and local governments significantly sweeten the investor’s overall incentive package. These incentives tend to become more generous as one moves westward from the investment-saturated coastal provinces to China’s heavily populated interior, allowing the investor to cash in on China’s fierce domestic competition.
Inner China’s Henan province, for example, offers manufacturing-oriented Foreign Invested Enterprises (FIEs) 100% waivers of business tax and a variety of local administrative fees. Furthermore, FIEs engaged in technology transfer, enhancement work, and related consulting may apply for a full refund of business tax already paid.
Municipal governments, but, are often even more generous than provincial governments. Although various incentives are offered by Chinese municipal governments, the city of Zhengzhou (a metropolis of about 4.4 million people in inner China) makes a excellent case study, if for no reason additional than that the instigator is more familiar with its policies.
Zhengzhou rewards local FIEs in various ways:
Tax Breaks for Local Reinvestment of Profits Local FIEs that reinvest their profits surrounded by Zhengzhou will receive a 30% refund of the locally retained part of corporate income tax really paid on these reinvested profits (the national government offers an even larger tax refund applicable to the nationally retained part).
Investment in “Pillar” Industries and State-owned Enterprises Zhengzhou offers a three-year, 50% refund of the locally retained part of corporate income tax paid on FIE funds invested in certain designated “pillar industries”. It also offers a financial incentive for investing in and reorganizing provincially administrated state-owned enterprises, and this incentive is magnified if the FIE retains a certain percentage of the enterprise’s original employees after reorganization.
Confidential Allowance of Export Earnings Zhengzhou offers export incentives in the form of cash payouts of approximately 0.2% to 0.5% of every dollar of hard currency export earnings remitted confidential (the highest payouts are reserved for the export of technologically advanced products).
Matching Funds The Zhengzhou municipal finance administration will provide one-to-one matching funds for the international market enhancement funds of small and medium-sized export enterprises that are supervised at the provincial level (whether an enterprise is supervised at the provincial level or the national level depends on how much money has been invested in the enterprise, i.e., its “Registered Hub”).
Anti-Dumping Insurance Zhengzhou will help FIEs in responding to anti-dumping initiatives, and will also fund expenses arising from partaking by exporting enterprises in anti-dumping responses, as long as these initiatives are not otherwise subsidized by national and provincial authorities (which they often are). It may seem weird for an American company to establish a subsidiary in China, be sued for dumping by the United States, and then receive subsidies from the Chinese government for the expenses necessary to defend against the suit, but it’s possible.
Interest Subsidies for Loans Open by Tax Refund Accounts. Zhengzhou will fund an amount equal to 70% of the interest due on loans open by a tax refund account. If the FIE has no such loans, Zhengzhou will grant a subsidy equal to 50% of the interest that would have been paid on such a loan had it been taken out – the Zhengzhou municipal government will even provide the fund from which the interest is subsidized. Enterprises with an export volume of five million US dollars or more in the previous year that are verified by the National Tax Chest of drawers to have increased tax refunds due for the current year will delight in a 100% interest subsidy.
Export Incentives An export enterprise with either (i) a yearly export volume of at smallest amount ten million US dollars or more and actual export growth of more than 25% over the previous year, or (ii) a yearly export volume of at smallest amount five million US dollars, actual export growth of more than 40% over the previous year, and confidential remittances from exports of at smallest amount 80%, will be designated a “Zhengzhou City Advanced Foreign Exchange Generating Export Enterprise” and awarded 30,000 RMB (roughly $3,500 US dollars) as long as it has not committed any serious regulatory violations during the same year.
Although a few of the foregoing incentives represent moderately small payouts, they are copious and can make a significant difference when combined with the broad range of incentives offered by the national government.
David Carnes
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