On 28 October 2022, the National Development and Reform Commission and the Ministry of Commerce released the Catalogue of Encouraged Industries for Foreign Investment (2022 Edition). The Catalogue, which came into force on 1 January 2023, is an important foreign investment promotion policy in China, as well as an important foreign asset industry and regional policy, listing specific industries, fields and regions that the government encourages and guides foreign investors to invest.
Subsequently, to better guide taxpayers to enjoy the reduction and exemption of taxes and fees related to imported equipment in the policy, on 5 December 2022, the General Administration of Customs issued the “Announcement on the Matters Related to the Implementation of the Catalogue of Encouraged Industries for Foreign Investment (2022 Edition)”, further elaborating the guidance on import VAT and customs duties involved in the execution of the policy.
Preferential policies issued in the new version of the Catalogue
The new version of the Catalogue continues the structure of the 2020 edition and includes two parts, the first part is the National Catalogue of Encouraged Industries for Foreign Investment (hereinafter referred to as the National Catalogue), which applies to the whole country. The second part is the Catalogue of Advantageous Industries for Foreign Investment in the Central and Western Regions (hereinafter referred to as the Midwest Catalogue), which applies to the Central and Western Regions, Northeast China and Hainan Province.
Foreign investment in industries and fields in the Catalogue can mainly enjoy three preferential policies:
- Imported equipment for self-use within the total investment is exempt from customs duties, except for products not exempt from tax exemption as stipulated by the state.
- For encouraged industrial projects with intensive land use, priority is given to the land supply, and the transfer reserve price may be determined at 70% of the national minimum price standard for industrial land transfer corresponding to the location.
- Investments in the western regions and Hainan Province Free Trade Zone that meet the requirements can further enjoy a reduced corporate income tax (CIT) at the rate of 15%.
From the perspective of the industries covered by the Encouragement Catalogue, China tends to encourage advanced manufacturing and modern service industries. When the encouraged industries invest in China to set up companies or factories, they can enjoy the exemption policy from tariffs in accordance with relevant regulations for imported equipment for self-use that need to be used for investment.
Especially for investment projects that invest in setting up factories in China, it gives strong support from the land supply to reduce the cost of building factories. From the perspective of encouraged regions, the Hainan Free Trade Zone and the western regions with a weak economic foundation are key areas where the state hopes to bring in more foreign investment, and enterprises investing in these regions can further enjoy the preferential treatment of enterprise income tax.
Import VAT & customs duties for the encouraged industries in the Catalogue
Regarding the implementation of the preferential policy of importing equipment for self-use within the total investment amount and exempting from tariffs except for products that are not exempt from tax exemption according to national regulations for industries that are listed in the Catalogue, the General Administration of Customs has given specific guidance on investment projects in different situations in the “Announcement on the Matters Related to the Implementation of the Catalogue of Encouraged Industries for Foreign Investment (2022 Edition)”, and the specific content of the announcement is as follows:
Starting from 1 January 2023, for foreign-invested projects within the scope of the Catalogue (2022 Edition), equipment for self-use imported within the total amount of investment, as well as technology and accessories and spare parts imported with the aforementioned equipment in accordance with the contract, except for commodities listed in the Catalogue of Imported Commodities Not Exempt from Tax Exemption for Foreign-Invested Projects and the Catalogue of Major Technical Equipment and Products Imported Not Tax-Exempt. Following Guofa Document No. 37 and the General Administration of Customs’ Announcement No. 103 of 2008 and other relevant regulations, customs duties are exempted, and value-added tax at the import stage is levied according to the regulations.
Acclime’s interpretation: This policy is an update to Guofa Document No. 37. That is, before 1 January 2023, imported equipment that meets the conditions will enjoy double exemption from import VAT and customs duties, and from 1 January 2023, eligible imported equipment will only enjoy tariff reduction, and import VAT will resume being collected. For the above-mentioned encouraged industries, as long as they meet the conditions of general VAT taxpayers, the import VAT paid by them can be deducted from the output VAT on their sales income, so the resumption of import VAT collection may have an impact on the cash flow of enterprises, but will not increase the tax costs of such enterprises.
For foreign-invested projects that were examined, approved or filed before 1 January 2023, which fall within the scope of the Catalogue (2022 Edition), the relevant project unit may go through the tax reduction review and confirmation procedures with the Customs under the provisions if it obtains the “Project Confirmation Letter” and other relevant documents issued by the competent department. If the project unit falls within the scope of the Catalogue (2020 Edition), and if the project unit obtains the “Project Confirmation Letter” and other relevant documents issued by the competent department before 1 January 2024, it may go through the tax reduction review and confirmation procedures with the Customs following the regulations.
Acclime’s interpretation: This clause ensures the policy’s smooth implementation before and after. Foreign investment will still enjoy import VAT, and duty reductions for imported equipment and spare parts approved before 1 January 2023.
For foreign-invested projects under construction that do not fall within the scope of the Catalogue (2020 Edition) but fall within the scope of the Catalogue (2022 Edition), imported equipment for self-use, as well as technology and accessories and spare parts imported with the aforementioned equipment in accordance with the contract, enjoy preferential import tax policies with reference to Article 1, but if the imported equipment has already been taxed, the tax amount will not be refunded.
Acclime’s interpretation: This clause is a supplementary explanation of the policy in clause two on how equipment and accessories belonging to the Catalogue (2022 Edition) but not part of the Catalogue (2020 Edition) is entitled to the policy. Compared with the Catalogue (2020 Edition), the newly added industries in the Catalogue (2022 Edition) can enjoy the preferential policy of Article 1 after 1 January 2023, and the policy is not applicable to tariffs that have been incurred previously.
The release of the new Catalogue of Encouraged Industries and related implementation matters provides the investment direction and tax guidance encouraged by the government for foreign investment in China. The implementation announcement of the General Administration of Customs provides specific implementation plans not only for foreign investors who will invest in China, but also for projects under construction that have already invested in China, and how relevant projects that have passed the examination, approval or filing can enjoy the applicable tax exemption policies under the new version of the Catalogue.
Enterprises in relevant industries and regions that fit the Catalogue can enjoy preferential policies such as tariffs, land transfer or enterprise income tax. This policy will further promote the investment of encouraged industries and regions, and drive the economic development of related industries and regions.
Acclime will continue to pay attention to the implementation of the Catalogue’s relevant policies and the industry’s development and provide further policy analysis and information for foreign enterprises wishing to conduct business activities in China. If you would like to know more about the Catalogue or if you want to know if your company can enjoy the above preferential policies, please feel free to reach out to us.