China: Shanghai pilot free trade zone is officially launched

Khoonming Ho		Lewis Lu

On July 3 2013, the State Council passed the Overall Plan for China (Shanghai) Pilot Free Trade Zone (the zone). In August 2013, the establishment of the zone was formally approved. The zone covers a total area of 28.78km² and includes Shanghai Waigaoqiao Free Trade Zone, Waigaoqiao Bonded Logistics Park, Yangshan Bonded Port and Shanghai Pudong Airport Comprehensive Bonded Zone. The zone was officially launched on September 29 2013.

The Overall Plan is implemented in the finance, shipping and other services fields, and involves innovations in administration, taxation and legislation, including new models of trade supervision, opening up of new investment opportunities, the negative list management model on foreign investors, the convertibility of the RMB capital account, and the introduction of tax preferential policies.

The establishment of the zone will lead the way for innovation in China's trade supervision model. In the zone, supervision of the state border will focus mainly on passengers, while goods will be subject to centralised, categorised and electronic supervision and will be able to flow efficiently and swiftly within the zone. These reforms will effectively enhance the development of modern service industries in the zone, leading to the formation of an attractive and competitive international logistics centre.

The Overall Plan expands certain industries for investment, including financial services, shipping services, commercial trading services, professional services, cultural services, and other social services, suspending or eliminating restrictions on investment in above areas in terms of the qualification requirements, equity holding limits, business scope limitations and other access restrictions.

The Overall Plan intends to relax certain restrictions on foreign investors, for example to grant foreign investors national treatment, to adopt negative list management model (exclusion list), and to replace pre-approval with filing management for the areas outside of the exclusion list. The exclusion list was issued on September 30, covering eighteen sectors including agriculture, manufacturing, finance, and public services.

Financial sector related reform is one of the key highlights in the Overall Plan. It is expected that further reforms will take place to promote the convertibility of the RMB, the cross-border use of the RMB and interest rate liberalisation.

Tax reforms do not appear to be the key drivers under the current Overall Plan. The Overall Plan introduces certain favourable tax measures to promote investment and trade, especially tax deferral payment via instalment on income derived from asset valuation appreciation and individual income derived from stock-based incentive compensation; export tax rebates for finance leasing companies; to complete tax policies for overseas equity investment and offshore business development.

The establishment of the China (Shanghai) Pilot Free Trade Zone is a significant milestone for China's economic transformation and we expect this to be only the first of many new reforms to come in the near future. We suggest business pay close attention to the publication of relevant policies and take full advantage of the enhanced economic structure, regardless of whether they have established a presence within the free trade zone.

Khoonming Ho (khoonming.ho@kpmg.com)
KPMG, China and Hong Kong SAR
Tel: +86 (10) 8508 7082

Lewis Lu (lewis.lu@kpmg.com)
KPMG, Central China
Tel: +86 (21) 2212 3421

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