Knowledge & Opinions
26 Jan 2022

China: Why enter Shanghai’s free trade zone?

MSI's Chinese accounting member LehmanBrown International Accountants explore Shanghai’s FTZ and the benefits that international companies can gain.

Free Trade Zones (“FTZs”) have long been part of China’s expansion and a way of encouraging foreign companies to invest and do business in China. Over time, China has been adding preferential policies to make the FTZs more and more appealing, each zone having its own individual and unique characteristics. Now China has around 21 approved FTZs, including in Beijing. Each has expanded its own specialisation areas to compete for international investments, businesses and entrepreneurs, and to attract talent linked with its specific characteristics, which is positive news for anyone wanting to do business in China if they fall into these categories. Shanghai’s FTZ (“SHFTZ”) has been of particular interest since its establishment in September 2013. It was the first of the new type of zones to be established in China and is gradually being aligned to be less export-oriented and more services-oriented following the national plan. At the national level, China publishes a Negative List, which advises which industries are not open to foreign investment or are partially open and or with conditions. But the FTZs have fewer prohibited or restricted industries as they have their own Negative Lists, which are generally more open lists, as is the case in the SHFTZ.

How to Register the Business in Shanghai’s FTZ?

Registering in the SHFTZ takes about one month, as the process for registering has been streamlined between different departments (some cite five days, but in reality, it will take some time to arrange all of the documentation). Maintenance of the business from a compliance perspective in the SHFTZ is easier as well than outside of the SHFTZ. For a quick and easy registration, a virtual office can be allowable in the SHFTZ, with a business later considering a formal office once it starts to trade fully. During Covid, a lot of companies have been getting set up and established in the SHFTZ so that they are ready for post-Covid times.

What Benefits can a Business Expect in Shanghai’s FTZ?

Businesses that establish themselves in SHFTZ can benefit from duty-free import and warehousing within the zone, allowing overseas goods to arrive in China and duty be paid only when leaving the SHFTZ or sold in the SHFTZ. This is also enticing thanks to the simplified customs procedure, fully digitalised, saving time and money. Foreign Exchange controls allow a company in SHFTZ to establish a Free Trade Account (FTA). The FTA allows a company to receive and convert Renminbi and other currencies more easily, overcoming some of the SAFE administration (State Administration of Foreign Exchange) red tape with simplified banking procedures. Overseas parent companies of the operations in the SHFTZ can issue RMB bonds in the domestic capital markets following national laws and regulations. Individuals employed in the FTZ can open non-resident inbound investment accounts in the FTZ to engage with inbound investment, including security investments, while allowing to invest in “A” share market without being in the Qualified Foreign Institutional Investor (QFII) program.

Industry Specific Benefits

Those involved in the E-commerce and online data processing industry can specifically benefit from the relaxed restriction on the equity ratio of foreign investments. While expanding, the foreign investors in SHFTZ can invest 100% in the E-commerce and online data processing company operating in the SHFTZ. Financial sector securities companies and securities investment fund management can have a 51% equity shareholding. Whilst in the automotive industry, it is possible to have more than a 50% stock ratio for vehicle manufacturing, and foreign companies can establish Joint Ventures with more than two similar vehicle products in China.

Shanghai FTZ Tax Benefits

Investors injecting non-monetary assets as capital into the companies located in the SHFTZ can average the premium from the appreciation of the assets over five years for China Corporate Income Tax (CIT) purposes. This benefit allows for the CIT liability to be put off, perfect for cash flow management, especially during tight financial situations. Lastly, individual talents or professionals with a share-based payment such as company gifted shares or ESOPs method can enjoy preferential Individual Income Tax (IIT) treatment when the payment is made in instalments within five years. However, it is essential to note that specific requirements must be met to enjoy that particular IIT benefit, and any schemes require registration.

Final Considerations

Even though establishing a company  in Shanghai’s FTZ can be very beneficial, the policies are frequently changing as the FTZs are used as experimental hubs for regulations or benefits, which are often later applied in some parts across the country. VAT on services is a good example of this, where it was implemented in Shanghai first. Most of the changes of the Shanghai FTZ are for the improvement of doing business there and expansion of allowable industries. Therefore, it is best to carefully examine what kind of structure might be best for the long-term strategy of the company within China.

Negative List Reduction & Advantage

As mentioned previously, there are fewer restrictions in the FTZ, which in 2020 saw the loosening of the restriction on Biomedicines and Education. For biomedicines foreign investments are allowed to invest in Chinese traditional medicines, while in education, they can establish training institutions as part of an educational system. In 2021 there have been signs of reducing the list further to manufacturing and services, focusing on improving manufacturing with high tech solutions.

How can LehmanBrown Help?

LehmanBrown International Accountants has been operating in Shanghai for two decades, helping companies in Shanghai, the original zone, and the Shanghai FTZ.  

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