Tax Policy Implementation: Substantive Operation Management for Encouraged Industry Enterprises in the Hainan Free Trade Port

Document Number: Qiong Shui Fa [2022] No. 102
Issuing Authority: Hainan Provincial Tax Service, State Taxation Administration
Date of Issue: December 7, 2022

Core Content Summary

To ensure the effective implementation of preferential corporate income tax policies in the Hainan Free Trade Port, this notice defines clear standards and procedures for determining whether “Encouraged Industry Enterprises” are substantively operating within the Free Trade Port.
Only enterprises meeting these criteria may enjoy the 15% corporate income tax rate and related preferential measures under Caishui [2020] No. 31 and its extension Caishui [2025] No. 3.

I. Understanding the Policy Standards

(1) Standards for Production and Operation within the Free Trade Port
Production and operation within the FTP are assessed on two levels:

• Business-level: The main production and business activities are located in the FTP.

• Management-level: The institution exercising substantive management and control—responsible for operational, financial, and personnel decisions—is located in the FTP.
  Meeting either of these criteria is sufficient to be considered as “operating within the FTP.”

(2) Standards for Personnel Presence within the FTP

Within a tax year, an enterprise must have a minimum number of employees residing in the FTP for at least 183 cumulative days, as follows:

• Fewer than 10 employees → at least 3 employees.

• 10–99 employees → at least 30% of employees.

• 100 or more employees → at least 30 employees.

(3) Calculation of the Number of Employees

Employee count includes both directly employed staff and dispatched workers.

• Enterprises headquartered in the FTP: includes employees of both the head office and its FTP branches.

• Enterprises headquartered outside the FTP: includes employees of branches within the FTP.

• Non-resident enterprises: includes employees of FTP-based establishments or premises.

The same employee may not be double-counted across enterprises. Employee numbers are determined using the quarterly average over the tax year:

Quarterly Average = (Start of Quarter + End of Quarter) ÷ 2
Annual Average = Sum of Quarterly Averages ÷ 4

(4) Calculation of Days of Residence

Residency days refer to the total number of days an employee stays in the FTP during a tax year.
A stay of less than 24 hours counts as one full day.
If the actual operating period is less than six months, the 183-day standard is halved proportionally.

II. Optimizing Tax Services

(1) Clear Policy Communication

Local tax bureaus shall use both online and offline channels to ensure taxpayers fully understand the policy, receive accurate guidance, and enjoy preferential treatment compliantly.
Staff training must be strengthened, especially for front-line tax service personnel, ensuring efficient and professional taxpayer assistance.

(2) Strengthening Ongoing Guidance

During annual CIT prepayment periods, local bureaus shall provide risk reminders and guidance to enterprises declaring FTP tax benefits for the first time or employing high-end and in-demand talents newly eligible for the 15% individual income tax cap.

(3) Simplified Filing Procedure

Eligible enterprises shall follow the “self-assessment, declaration with commitment, and document retention for inspection” model.
When filing annual CIT returns, enterprises must submit the Self-Evaluation and Commitment Form for Substantive Operation via the Hainan Provincial Electronic Tax Bureau together with their declaration.

(4) Post-Verification Procedures

After annual CIT settlements, tax authorities, in coordination with finance and market supervision departments, conduct joint verification of newly qualified enterprises enjoying FTP tax benefits and those employing eligible high-end talents.
Existing enterprises are subject to sampling verification.
Before inspection, enterprises must upload employee ID and residency data to the Hainan Provincial Electronic Tax Bureau system for verification.

III. Handling Disputes

The Hainan Provincial Market Supervision Administration leads the coordination mechanism for resolving disputes related to determining substantive operation.
Local tax authorities must handle disputes fairly, safeguard taxpayers’ legitimate rights, and ensure consistent and transparent implementation of FTP preferential tax policies.

Lead Department

Issuing Authority: Hainan Provincial Tax Service, State Taxation Administration
Official Website: https://hainan.chinatax.gov.cn
Supporting References:

• Announcement No. 1 (2021) — Substantive Operation Requirements for Encouraged Industry Enterprises in the Hainan FTP

• Supplementary Announcement No. 5 (2022)

• Caishui [2020] No. 31 & Caishui [2025] No. 3