Announcement on Issues Concerning the Substantive Operations of Enterprises in Encouraged Industries in the Hainan Free Trade Port

Announcement No. 1 [2021]

Issuing Authorities:
Hainan Provincial Tax Service, State Taxation Administration
Hainan Provincial Department of Finance
Hainan Provincial Administration for Market Regulation

Date of Issue: March 5, 2021

Purpose

To implement the Overall Plan for the Construction of the Hainan Free Trade Port and promote the development of enterprises engaged in encouraged industries, this announcement clarifies how to determine whether an enterprise is “substantively operating” (实质性运营) in the Hainan Free Trade Port (hereinafter referred to as the “Free Trade Port”).

The clarification is made in accordance with:

• Notice of the Ministry of Finance and the State Taxation Administration on Preferential Corporate Income Tax Policies for the Hainan Free Trade Port (Caishui [2020] No. 31), and

• Announcement of the Hainan Provincial Tax Service, State Taxation Administration on Issues Concerning Preferential Corporate Income Tax Policies for the Hainan Free Trade Port (Announcement No. 4 [2020]).

Key Provisions

I. Scope of Application

This announcement applies to:

• Resident enterprises registered in the Free Trade Port;

• Branches established in the Free Trade Port by resident enterprises; and

• Establishments or places set up in the Free Trade Port by non-resident enterprises.

II. Enterprises Registered in the Free Trade Port with No Branches Outside

A resident enterprise registered in the Free Trade Port that engages in encouraged industry projects and has not established any branches outside the Free Trade Port shall be considered to be substantively operating in the Free Trade Port if its production and operations, personnel, accounting, and assets are all located within the Free Trade Port.

However, if any of these four elements — production and operations, personnel, accounting, or assets — are located outside the Free Trade Port, the enterprise shall not be deemed to be substantively operating in the Free Trade Port and may not enjoy the preferential corporate income tax policies.

III. Enterprises with Branches Outside the Free Trade Port

A resident enterprise registered in the Free Trade Port that engages in encouraged industry projects and has established branches outside the Free Trade Port shall be regarded as substantively operating in the Free Trade Port if it exercises substantive and comprehensive management and control over the production and operations, personnel, accounting, and assets of its branches.

IV. Branches or Institutions Established in the Free Trade Port by Enterprises Outside the Port

A branch established in the Free Trade Port by a resident enterprise registered outside the Free Trade Port, or an establishment or place set up in the Free Trade Port by a non-resident enterprise, shall be deemed to be substantively operating in the Free Trade Port if it:

• Possesses actual production and operation functions, and

• Maintains operating income, employee compensation, and total assets commensurate with those functions.

V. Calculation and Payment of Corporate Income Tax for Enterprises with Branches

Where:

• A resident enterprise registered in the Free Trade Port establishes branches outside the Port, or

• A resident enterprise registered outside the Port establishes a branch in the Port,

the taxable income and tax payable of the head office and each branch shall be calculated strictly in accordance with the Administrative Measures for the Collection of Corporate Income Tax on Consolidated Tax Payments for Cross-Regional Operations (State Taxation Administration Announcement No. 57 [2012]), and corporate income tax shall be paid accordingly.

VI. Tax Payment by Non-Resident Enterprises with Establishments in the Free Trade Port

Where an establishment or place of a non-resident enterprise set up in the Free Trade Port meets the prescribed conditions for consolidated payment of corporate income tax, the taxable income and tax payable shall be calculated in accordance with the Announcement of the State Taxation Administration, the Ministry of Finance, and the People’s Bank of China on Issues Concerning the Consolidated Payment of Corporate Income Tax by Establishments or Places of Non-Resident Enterprises (State Taxation Administration Announcement No. 12 [2019]), and tax shall be paid as required.

VII. Documentation and Record-Keeping

Enterprises that meet the substantive operation criteria and enjoy the preferential corporate income tax policies for encouraged industries shall, after completing the annual final settlement, collect, organize, and retain relevant supporting materials in accordance with Announcement No. 4 [2020] of the Hainan Provincial Tax Service, State Taxation Administration, for inspection by the tax authorities.

VIII. Tax Collection Method

Enterprises enjoying preferential tax policies shall calculate and pay corporate income tax under the account-based verification (查账征收) method.

IX. Period of Implementation

This announcement is effective from January 1, 2020 to December 31, 2024.

Issuing Authorities:
Hainan Provincial Tax Service, State Taxation Administration
Hainan Provincial Department of Finance
Hainan Provincial Administration for Market Regulation

Date: March 5, 2021