The Hengqin FTZ, located in the Guangdong-Macao region, has issued a number of regulations that provide investment incentives and make obtaining staff visas easier. In particular, it offers a double 15% taxation exemption, which has already attracted numerous companies to the FTZ. In addition, the FTZ is providing incentives to attract high-tech companies in four key sectors.
Contents
Assistance to Tech R&D and High-Tech Manufacturing
Industries Eligible for Receiving Investment Incentives
In 2021, China’s prime minister issued the Hengqin FTZ Planning Policy as a blueprint for designating several high-tech industries for incentives. The central government more recently laid out specific implementation details in its 2023 Hengqin FTZ Master Development Plan.
The Planning Policy mandates the local government to attract businesses with expertise in the microchip, microelectronics, and Internet technology fields. The more specific Hengqin Development Plan sets an objective of establishing a semiconductor design and manufacturing hub, with a stable supply chain covering each step; from chip design, wafer production, testing, and inspection, all the way to device integration. China also seeks to promote the digital economy and encourage a technology ecosystem to facilitate artificial intelligence.
Multi-currency investment funds and private equity funds are also encouraged, which will supplement Macau’s existing wealth management, bond market, and capital markets. Therefore, the Development Plan emphasizes incentivizing a robust financial sector in the FTZ. It additionally supports financial services through FDI supported by debt financing.
This article will provide a walkthrough of the Hengqin investment rules. As there is a lot of misinformation on the internet about China’s foreign investment laws, we always recommend doing further reading US/UK English versions of official government guidance and regulations.
Additional FDI Incentives Are Offered for the Hengqin FTZ
In the past several years, China has developed a complex foreign investment regulatory regime that provides national treatment for investors, while excluding them from certain industries essential to national security. Specifically, foreign investors are not provided access to any industry shown on China’s Exceptions List to Foreign Investment access. To learn more about the regulatory big picture, make sure to read the PRC government’s guidance in How Foreign Investment is Regulated.
In 2023, the government issued a list of industries encouraged in the Hengqin FTZ. As Hengqin is a geographically small area, the number of encouraged industries on its list is limited compared to other FTZs. A novel aspect of Hengqin’s list of encouraged industry categories is that it applies to both Chinese and foreign-owned entities. However, Hengqin’s market access rules state that national regulations apply if there are conflicting rules: for foreign businesses, this means the Exceptions List to Foreign Investment Access imposes numerous limitations.
In practice, this means that many of the investment incentives provided by the Hengqin policy such as for education, healthcare, and telecommunications, are actually targeted at domestic Chinese companies. A rationale for this unusual policy formulation is the FTZ’s principal objective is to diversify the Macao economic region’s industries. The overall theme apparent in the Hengqin industries list is a plan to integrate Macao into the national economy by promoting diversification.
The Hengqin FTZ Offers Several Tax and Regulatory Incentives
Hengqin’s double 15% tax reduction is the centerpiece of the zone’s FDI incentives policy and first appears in the central government’s Planning Policy. Implementing regulations were developed by the China Finance Ministry’s tax administration in a 2022 Circular, enabling eligible investors to take advantage of the double reduction (see Tax Gazette (2022) No. 19). Business entities operating in the Hengqin policy’s industry preference list that derive over 60% of their income from the incentivized industry and carry on “substantial operations” within the FTZ are eligible for a 15% business income tax reduction.
The schedule of industries in the Circular covers nine industries and lists 150 specific types of business operations that qualify for tax incentives. Therefore, a business considering taking advantage of the 15% business tax rate in China reduction by investing in the FTZ should first assess whether its activities fall within any of the categories listed.
The next most important tax rule is described in the Hengqin Personal Income Tax Incentive Policy Circular (Tax Gazette (2022) No. 3). It provides that foreign talent and those with rare skill sets receive an exemption for all income tax that would be charged after the first 15%.
The Circular defines individual income to cover all income sources, whether salary, independent consulting fees, or invention royalties, and includes Chinese government direct subsidies. The income tax benefit does not apply to salary withholdings, however, and is applied as an annual tax refund.
To further interpret the tax rules, Hengqin issued the Talent Tax Incentive Procedures, which cover how to specifically determine whether a foreign person qualifies as “talent” and the specific process for applying the tax policy.
Policy Provides Assistance to Businesses Operating in Technology R&D and High-Tech Manufacturing.
On top of the 15% tax incentive offered, the Hengqin FTZ also offers several incentive and assistance policies, governed by Hengqin’s 2024 FTZ Technology Promotion Procedures. A package of incentives and subsidies is provided for technology R&D and high-tech manufacturing, with the goal of integrating Macao into the mainland China economy. Small and medium businesses that qualify as “innovators” can be eligible for one of three subsidy offers: CNY 800,000, 3 million, or 4 million. Businesses qualifying as unicorn companies, seed-stage unicorns, or potential unicorns, are offered CNY 20 million, 5 million, and 3 million respectively.
The Hengqin FTZ Integrated Circuit Industry Development Procedures includes two regulatory documents for incentivizing high-tech companies and provides for office setup, R&D, and growth subsidy packages for semiconductor companies. Another document is the 2022 Hengqin Tax Office’s Procedures to Provide Ten Tax Incentives for Metaverse Technology Development. In addition to R&D, these procedures allow incentives for innovative business models.
FTZ rules are complex and involve a lot of administrative discretion, therefore you should have a business plan evaluated with legal compliance memoranda in Chinese, and English versions prepared by professional translators — not outsourced to unprofessional workers like freelancers or in-house staff. Make sure that both local and international personnel can clearly understand the requirements. The physical presence test, in particular, requires a high degree of coordination between legal counsel and business execution.
Qualifying for Hengqin Incentives Requires Passing a “Physical Presence” Test
A physical presence requirement applies to all Hengqin FTZ incentives, whether tax, assistance, or subsidy. The definition of physical presence is provided by the 2023 Hengqin FTZ Business Physical Presence Determination Circular. Physical presence in Hengqin specifically means production, staffing, financing, and assets located within the FTZ. For example, suppose a business entity is formed within the FTZ but locates any one of the above outside the FTZ. That entity would not qualify as having a physical presence within the FTZ for the purposes of qualifying for China tax incentives.
The Circular also further interprets rules defining production, staffing, financing, and assets within the FTZ. For a representative provision, it interprets staffing and financing “within the FTZ” as requiring that staff salaries be processed at a bank branch within the FTZ. Moreover, employment benefits such as China social security and unemployment insurance must be paid for a certain minimum number of employees directly to the local social security office; the minimum number of employees is determined using a sliding scale based on the size of the business, ranging from minimums of 3 to 30 employees.
The asset requirement is interpreted as meaning that the entity is in possession of property to which it holds title or leasehold and that the asset is used by the qualifying entity physically within the FTZ or by another party subject to the entity’s control. Moreover, the type of assets must be appropriate to the declared business operation category.
To put it more plainly, a business in China that wants to be awarded the tax incentives offered in the Hengqin FTZ must be doing business locally, with both staff and operations there. This is different from some other jurisdictions such as Delaware, Ireland, and Shanghai Pudong, where a company’s presence is often limited to a registered agent or mailbox. Most of the other incentives and assistance also require physical presence, with a stated policy objective of preventing shell companies from taking advantage of the policies.
The Circular provides exceptions for only a minority of use cases. For example, if a resident business entity formed outside the FTZ sets up an unincorporated local organization within the zone, or a non-resident entity sets up an unincorporated organization or workplace, the local organization in China itself can qualify as having a physical presence. In this case, the physical presence criteria will be satisfied for the local operation’s activities within the FTZ. The local operation will be eligible for the 15% tax incentive and other assistance policies.
The policy also has special incentives for a business entity formed and residing in the FTZ that meets the qualification criteria and also has operations outside the FTZ. So long as such an entity has complete control over the operations, staffing, finance, and assets located outside the FTZ, those operations are treated as if they are located within the FTZ for purposes of applying incentives. To put it more plainly, investors forming a business headquartered in the FTZ and operating in other parts of China are also entitled to the 15% tax preference and other subsidies for their entire business. Hengqin hopes to attract corporate subsidiaries and affiliates that use the FTZ as a base of operations for business done throughout China.
Conclusion
The Hengqin FTZ has established robust investor incentive policies designed to attract foreign investors in the high-tech R&D and manufacturing sectors. The Hengqin policies in many ways are highly novel for China, so businesses should make sure they fully understand the policies when considering their investment options.
FURTHER READING
Get authoritative insights about Chinese foreign investment law from official government guidance in translation:
For a general overview of this topic, see also CBL’s Foreign Investment FAQ.