Tax Policy Clarification: Supplementary Announcement on Substantive Operation Requirements for Encouraged Industry Enterprises in the Hainan Free Trade Port

Document Number: Announcement No. 5 of 2022
Issuing Authorities: Hainan Provincial Tax Service (State Taxation Administration),Hainan Provincial Department of Finance, Hainan Provincial Market Supervision Administration
Date of Issue: September 27, 2022
Effective Period: January 1 2023 – December 31 2024

Core Content Summary

This supplementary announcement refines the standards established in Announcement No. 1 of 2021 for determining whether enterprises in Encouraged Industries are substantively operating within the Hainan Free Trade Port (FTP).

Only enterprises that meet these substantive-operation criteria may benefit from the 15% Corporate Income Tax rate and related preferential FTP tax policies under Caishui [2020] No. 31 and its subsequent extensions.

I. Definition of “Production and Operation within the FTP”

Enterprises must:

• Possess a fixed production or operating site and necessary equipment and facilities in the FTP;

• Have their primary production or business activities located within the FTP; or

• Locate the institution exercising substantive management and control over production and operations (including signing external contracts in the enterprise’s own name) within the FTP.

II. Definition of “Personnel in the FTP”

Enterprises must employ sufficient staff who actually work in the FTP to meet operational needs, with wages and salaries paid through bank accounts opened by the enterprise in the FTP.

Depending on company size, within each tax year:

• Fewer than 10 employees → at least 3 employees residing in the FTP for ≥ 183 days;

• 10 to 99 employees → at least 30% of employees residing for ≥ 183 days;

• 100 or more employees → at least 30 employees residing for ≥ 183 days.

III. Definition of “Accounts in the FTP”

Accounting vouchers, ledgers, financial statements, and other accounting records must be stored within the FTP.
The enterprise’s basic deposit account and bank accounts used for core business transactions must also be opened in the FTP.

IV. Circumstances Deemed Not to Meet Substantive Operation Standards

An enterprise will be considered non-compliant if it:

1. Lacks production or operational functions and serves only for internal financial settlement, tax filing, or invoice issuance for mainland operations; or

2. Has a registered address inconsistent with its actual operating address and cannot be contacted or fails to provide a verifiable physical location.

V. Application to High-End and In-Demand Talents

For enterprises or institutions employing high-end and in-demand talents who enjoy FTP individual income tax benefits under the Interim Measures for the Management of the List of High-End and In-Demand Talents (Qiong Fu [2022] No. 31), substantive-operation standards shall be applied by reference to this Announcement.

VI. Management Method

Substantive operation for enterprises enjoying FTP corporate income tax preferences follows the model of “self-assessment, declaration with commitment, and post-verification.”
During annual CIT final settlement, enterprises must confirm their substantive operation status and submit the Self-Evaluation and Commitment Form for Substantive Operation, bearing full responsibility for the authenticity and accuracy of submitted materials.

VII. Joint Verification Mechanism

The Provincial Tax Service, Finance Department, and Market Supervision Administration jointly operate a substantive-operation verification mechanism.
This mechanism conducts full-coverage verification for newly qualified enterprises and those employing high-end talents benefiting from FTP IIT policies, while sampling verification applies to existing enterprises.

VIII. Dispute Resolution Mechanism

Where disputes arise over the determination of substantive operation, the Provincial Market Supervision Administration will take the lead, jointly with the Finance Department and Tax Service, to coordinate and resolve such cases.

IX. Effective Dates

This Announcement takes effect from January 1, 2023, and remains valid until December 31, 2024.

Lead Departments and Official Links

Issuing Authorities: Hainan Provincial Tax Service – State Taxation Administration; Hainan Provincial Department of Finance; Hainan Provincial Market Supervision Administration
Official Website: https://hainan.chinatax.gov.cn
Supporting References:

• Announcement No. 1 (2021) — Initial Definition of Substantive Operation

• Caishui [2020] No. 31 and Caishui [2025] No. 3 — Preferential CIT Policies

• Qiong Fu [2022] No. 31 — High-End Talent IIT Measures

• Qiong Shui Fa [2022] No. 102 — Implementation Notice for Local Tax Authorities