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Investing in China: Ten Points to Consider in Evaluating Local Investment Incentive Policies, Contributed by Carlo Geremia, NCTM Shanghai

Friday, December 9, 2011

Since 2008, when China Corporate Income Tax legislation was amended and preferential tax treatment for foreign-invested companies abolished, Chinese local governments have introduced new and substantial incentive policies to attract foreign investors. Some local governments have adopted written investment incentive policies. Others have informally adopted incentive policies but not yet put these in writing. In both cases, there are several points foreign investors should consider in order to better evaluate the incentives offered. This article provides information on how to better understand and assess a local investment policy in China.

1. Compliance with National Laws, Regulations and Policies

A local investment policy must comply with national legislation. If there is any inconsistency between the local investment policy and the national laws, regulations and policies, legislation at the national level will prevail. In particular, local investment incentive policies must comply with the relevant China five-year plan, currently the Twelfth Five-Year Plan (2011-2015). As a result, any undertaking or commitment by local governments in respect of investment incentives cannot be guaranteed to continue beyond December 31, 2015, the date marking the end of the Twelfth Five-Year Plan. For this reason, when written investment incentive policies are adopted, they usually have a final provision setting out their time frame (i.e., 2011-2015).1 Sometimes, however, the time frame is not very clear in the investment policy documents or, if there is no written policy, in the explanations provided by the local authorities. A practical implication is that when a local policy grants a 100% tax incentive for the first two years from a company’s establishment and a 50% tax incentive for the remaining years, “remaining years” means the years left through 2015. After 2015, the local government might still be able to grant an extension of the incentives originally offered. However, this will depend on their compliance with the investment directives of the new five-year plan.

2. Tax Incentives: Their Nature

An important element of a local investment policy is the granting of tax incentives to companies newly established within the jurisdiction of the local government. The nature of the tax incentives under the local investment policies is substantially different from the tax incentives enjoyed by foreign-invested companies before the 2008 China Corporate Income Tax reform. The new tax incentives are not tax exemptions. The companies enjoying tax incentives will still have to pay taxes, although they will be entitled to a "refund" several months down the line. Local investment policies refer to these tax incentives as “subsidies” (in Chinese:

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