Several Opinions on Financial Support and Economic Development During the "Twelfth Five-Year Period"

Issuing Body: Shanghai Integrated Bonded Area Management Committee
Issuing Date: May 10, 2010
Effective Date: January 1, 2011 to December 31, 2015

Shanghai, which has for years aggressively courted foreign investment, is again taking steps to make the city, and particularly the Pudong New Area, attractive to outside investors. On May 10, 2010, the Shanghai Integrated Bonded Area Management Committee—formed by the Shanghai city government last November to manage Pudong's three special development zones—issued the Several Opinions on Financial Support and Economic Development During the "Twelfth Five-Year Period" in order to stimulate and support economic development and industrial upgrade in Shanghai's three main special development zones, the Yangshan Bonded Port Area, Waigaoqiao Free Trade Zone, and Pudong Airport Integrated Bonded Zone.

The regulations, which expand the preferences available to foreign-invested enterprises, will be in effect from January 1, 2011, to December 31, 2015, the "twelfth five-year period" of planned development in China.

Special development zones are areas established for the development of certain industries in China. Enterprises within such areas are entitled to an array of favorable resources, including tax benefits, land, and financial support. Based on their different functions, there are six types of development zones: Free Trade Zones, Export Processing Zones, Bonded Logistics Parks, Bonded Port Areas, Integrated Bonded Zones, and Cross-Border Industrial Zones.

Financial Support

Newly established or newly introduced enterprises that engage in air or shipping transportation, logistics, transportation-related services, trade, processing, and maintenance activities are entitled to financial subsidies (refund of a certain percentage of taxes retained by local government), including a maximum of the following:

• For certain newly established enterprises, a refund of 100 percent of taxes levied by the local government on business turnover or profit in the first two years and a refund of 50 percent in following years
• For certain existing enterprises, a refund of 50 percent of taxes levied by local government on business turnover or profit.

Industrial Upgrade

Transportation, logistics, trade, processing, and maintenance enterprises that expand their scale of business and increase their registered capital by US$1 million or more are entitled to a financial subsidy for their capital increase fees, though no detailed amounts are stipulated. Meanwhile, key processing and manufacturing enterprises are entitled to money from a special financial support fund if they switch to manufacturing environmentally friendly products, manufacture products from "new" (and presumably more environmentally friendly) materials, or switch to cleaner sources of energy by means of a technology upgrade.

Additionally, newly established operational centers are entitled to a refund of 100 percent of taxes levied on business turnover or profit and retained by local government in their first three years of business and a 50 percent refund in subsequent years. Existing enterprises that obtain operational center qualification are entitled to a refund of 100 percent of the increased amount of taxes levied on business turnover or profit in their first three years and a refund of 50 percent in following years, as well as a 50 percent refund of the original amount of taxes retained by local government.

Auxiliary Policies: Support for Individuals

The opinions provide for a financial allowance and subsidies to certain senior management personnel of regional headquarters, operational centers, or key transportation enterprises. In addition certain financial subsidies may be granted to key management personnel of enterprises that make "outstanding contributions" to local economic development during the year.

The regulations provide an incentive for companies that actually do substantive business inside the special development zone (rather than, as is common, registering inside the zone but conducting most business elsewhere). Certain transportation, logistics, trade, processing, and maintenance enterprises that carry on actual operations at their registered address are, upon recognition of the Shanghai Integrated Bonded Area Management Committee, entitled to rent allowances for the leased apartment of employees.

Conclusion

Special development zones provide favorable treatment (both financial and otherwise) that may well be attractive to foreign investors. When selecting a suitable special development zone, however, foreign investors would be well advised to take into consideration a variety of factors besides direct subsidies: (1) Although such zones are rapidly developing in China's western regions, those located in eastern and southern China are still usually the first choice for foreign investment, especially for new investors. (2) A key point is to select the development zone that suits all the investor's needs, rather than simply selecting the cheapest. (3) Talk, if possible, with investors already inside the area to get a better understanding of the reality inside the special development zone, including the relative sophistication of the commercial and living environment, management philosophy, and "soft" environment factors, such as education levels, human resource environment, laws, and ideology.