Notice from the Hainan Provincial Taxation Bureau of the State Administration of Taxation Regarding Enhanced Management Services for Substantial Operations of Encouraged Industries in the Hainan Free Trade Port (Hainan Taxation Announcement [2022] No. 102)
Understanding Policy Standards
(1) Standards for Production and Operations in the Free Trade Port
There are two levels of standards for production and operations in the Free Trade Port. Firstly, there is the business-level standard, which requires that the primary location for production and operations be in the Free Trade Port.
Secondly, there is the control-level standard, which pertains to institutions that implement substantial and comprehensive management and control of production and operations in the Free Trade Port.
This includes decisions such as production and operational planning, control, assessment, financial decisions like borrowing, lending, financing, and financial risk management, as well as personnel decisions such as appointments, dismissals, and remuneration, which are made or executed by institutions established in the Free Trade Port. Meeting either of these standards indicates compliance with the standard for production and operations in the Free Trade Port.
(2) Standards for Personnel in the Free Trade Port
Within a tax year, a company must have at least 3 (inclusive) to 30 (inclusive) employees who have resided in the Free Trade Port for a cumulative total of 183 days.
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Specifically, for companies with fewer than 10 employees, at least 3 individuals (inclusive) must reside in the Free Trade Port for a cumulative total of 183 days within a tax year. For companies with 10 or more but fewer than 100 employees, at least 30% (inclusive) of the personnel must reside in the Free Trade Port for a cumulative total of 183 days within a tax year. For companies with 100 or more employees, at least 30 individuals (inclusive) must reside in the Free Trade Port for a cumulative total of 183 days within a tax year.
(3) Calculation of Workforce
The workforce includes both employees with whom the company has established labour relations and workers dispatched by labour service agreements.
For companies with their headquarters located in the Free Trade Port, the workforce refers to the total number of employees in both the headquarters and branch offices within the Free Trade Port.
For companies with their headquarters located outside the Free Trade Port, the workforce refers to the number of employees in their branch offices within the Free Trade Port.
For non-resident enterprises with establishments or venues in the Free Trade Port, the workforce refers to the number of employees in establishments or venues within the Free Trade Port.
The same employee cannot be counted multiple times across multiple companies. The total workforce is determined by the quarterly average value over the entire year, calculated as follows:
Quarterly Average Value = (Beginning of Quarter Value + End of Quarter Value) ÷ 2
Annual Quarterly Average Value = Sum of Quarterly Average Values for the Year ÷ 4
For businesses that commence operations or cease operations during the year, the actual operating period is considered as one tax year for determining the above-related indicators.
(4) Calculation of Residency Days
Residency days refer to the cumulative number of days spent in the Free Trade Port within a tax year.
If the stay in the Free Trade Port on a particular day is less than 24 hours, it is counted as one day.
For businesses that commence operations or cease operations during the fiscal year, and where the actual operating period is less than half a year, the standard of accumulating 183 days of residency is calculated by halving the number of days based on the actual operating period.
Optimizing Taxation Services
(1) Ensuring Effective Policy Interpretation
Local tax bureaus at the city and county levels are required to employ a combination of online and offline channels and various forms of publicity and guidance to help taxpayers fully understand policies.
They should actively guide taxpayers to comply and ensure the implementation of preferential policies. The bureaus should strengthen personnel training, especially for tax service hall consultants and advisory positions, to provide effective guidance and explanations and promptly address taxpayers’ difficulty issues. They are required to ensure that the publicly available policy consultation hotline operates smoothly, with efficient responses and accurate information.
(2) Strengthening Midstream Guidance
During the annual income tax prepayment period, local tax bureaus are required to primarily focus on providing risk reminder guidance to enterprises that are applying for the first time to enjoy preferential income tax treatment in the Free Trade Port and to individuals whose income has reached the standards for enjoying personal income tax benefits in the Free Trade Port, and who have not previously received substantial operational guidance.
They should enhance policy publicity and guidance to ensure that enterprises meet the standards outlined in the “Supplementary Announcement.”
(3) Simplifying Benefit Enjoyment Methods
For enterprises enjoying the preferential income tax policies for encouraged industries in the Free Trade Port, the application process adopts a method of “self-assessment, declaration commitment, and retention of relevant documents for future reference.”
When enterprises submit their annual income tax final settlement and payment declarations, they are required to fill out the “Commitment Form for Substantial Operation Self-Assessment” (attached below), and submit it along with the tax declaration forms through the electronic tax bureau.
(4) Implementing Post-Verification
After the end of the annual income tax final settlement and payment period, the tax authorities, together with the departments of finance, and market supervision and administration, will coordinate and organize joint verification activities.
The mechanism for joint verification and the competent tax authorities will conduct a “full coverage” verification on enterprises that newly enjoy the preferential income tax policies for encouraged industries in the Free Trade Port in the current year, as well as on enterprises or units belonging to high-end scarce talents who enjoy preferential personal income tax policies in the Free Trade Port. Existing enterprises or units will be inspected according to a certain proportion.
Before undergoing substantial operational verification by relevant departments, enterprises must first log in to the relevant modules of the Hainan Provincial Electronic Tax Bureau of the State Administration of Taxation, enter specific information about the identity cards of their employees based on the minimum residency standard corresponding to the scale of their enterprises in the Free Trade Port, and have the relevant departments verify the residency information entered by their employees.
Handling Disputes
The “Supplementary Announcement” has clearly stipulated that the provincial market supervision administration will take the lead in establishing a dispute coordination and resolution mechanism, providing a channel for resolving disputes over the substantial operation of enterprises. Local tax bureaus at the city and county levels should handle disputes properly, effectively safeguarding the legitimate rights and interests as well as reasonable demands of taxpayers. This aims to better ensure the effective implementation of preferential policies in the Free Trade Port and continuously foster a favourable business environment.
Related article: Compilation of important policies for Hainan Free Trade Port (February 2024)
