The Chinese economy’s services sector has been steadily increasing in importance as a motor of growth. In 2019, it accounted for 53.9% of GDP, contributing 59.4% of economic growth.
Government policies have sought to accelerate the transition to a high-end services economy, including the State Council (cabinet) approval of a master plan for developing Beijing’s service sector. This designates Beijing as a national comprehensive demonstration zone for services, setting out measures to facilitate the flow of trade and investment, and ease rules on employment of foreign workers.
Policies of relevance to specific sectors are as follows.
Science and technology sector
High-tech companies
China’s flagship corporate income tax (CIT) incentive for high-tech enterprises is the high and new technology enterprise (HNTE) incentive. This applies a 15% CIT rate in place of the standard 25% rate.
To obtain HNTE status, several criteria need to be satisfied, some of which frequently prove quite challenging in practice. In addition, the documentation requirements are very heavy. Beijing will simplify the HNTE status application process for companies in the integrated circuit, artificial intelligence, medicine, and critical materials sectors.
These can be automatically recognised as HNTEs and apply the incentive following an upfront record filing, so long as they have been in operation for over a year and they incur at least half their research and development (R&D) costs in China. This being said, the existing HNTE criteria must still be satisfied and relief can be clawed back on subsequent tax authority review, if conditions are found not to be satisfied.
Venture capital funds
In an effort to promote venture capital (VC) investment in technology companies, tax transparency rules have been introduced for corporate form VC funds. The income of such funds, established in the Zhongguancun technology hub in Beijing, will be attributed straight through to fund investors and individual income tax (IIT) will be applied, with no CIT applied at the fund entity level. This provides a useful alternative to partnership form funds.
Technology transfer
Chinese CIT rules provided an exemption for income from technology transfers between domestic enterprises, so long as transfer gains in a tax year did not exceed RMB 5 million ($743,450). This has been raised to RMB 20 million, and the range of technology areas covered has expanded, for enterprises in the Zhongguancun technology hub.
Digital economy and internet sector
Virtual private network
Foreign investors will be permitted to invest in Chinese domestic virtual private network (VPN) service enterprises, up to a 50% equity holding. Overseas telecom operators can provide domestic VPN services to foreign-invested enterprises (FIE) in Beijing via Chinese joint venture companies.
Financial sector
Finance companies
Multinational enterprises (MNEs) may set up wholly foreign-owned enterprise (WFOE) finance companies in Beijing.
Private equity
Private equity fund managers may use WFOEs to conduct equity investment and asset management activities.
Banks
Foreign-invested banks can act as custodians of portfolio investment funds, can act as lead underwriter in the inter-bank bond market, and can obtain gold import licenses.
Professional services sector
Foreign rating agencies may set up subsidiaries in Beijing, and conduct rating business in the inter-bank bond market and exchange bond market.
Foreign arbitral institutions and dispute resolution organisations may provide arbitral services.
Investment rules are also liberalised in the culture, tourism, education, and healthcare sectors. Alongside the above measures, Beijing will also grant preferential IIT treatment to high-end foreign staff working in designated fields.
While the details have not yet been published, it is expected that the rules would be with reference to the preferential IIT rules that are in place in the Guangdong Greater Bay Area (GBA) and Hainan free trade port (FTP) in South China. These provide for a 15% IIT outcome, which is likely a good reference for the Beijing scheme.
In parallel, the Chinese government has also approved the set-up of a Beijing free trade zone (FTZ), at the same time as FTZs in Hunan and Anhui. This brings China’s FTZs to 21 in total. The Beijing FTZ is expressly intended to support Beijing’s development as a high-tech, digital, services hub.
Lewis Lu
T: +86 21 2212 3421
