China Announces Import Tax Treatment to ‘Encouraged’ Foreign-Invested Projects

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Feb. 2 – In Announcement [2012] No. 4 released on January 29, the Chinese General Administration of Customs clarified the favorable import tax treatment to “encouraged” foreign-invested projects (FIPs).

Starting on January 30, FIPs (including capital increases to FIPs) listed in the “encouraged” category in the “Foreign Investment Industrial Guidance Catalog (2011 Version)” (“2011 FDI Catalog”) are exempt from customs duties when investors import equipment (for self use) and technology, accessories as well as spare parts that come along with the equipment based on related agreements. However, these importers are still subject to import value-added tax, which was resumed on such imports in 2009.

In addition, to be eligible for the tax treatment, the aforementioned imports shall be part of the FIP’s total invested capital, which is usually a combination of its registered capital and debt financing.

Announcement No. 4 also specifies that imports of products that are listed in the “Catalog of Products Imported for FIPs and Not Eligible for Tax Exemption” and the “Catalog of Imported Major Technical Equipment and Products not Eligible for Tax Exemption” shall be excluded from such tax treatment.

After the “2011 FDI Catalog” takes effect, the “Industrial Policy Item for Project Review (the “Policy Item”)” in the “Project Confirmation Letter” – a document issued by local authorities and required during the application for favorable tax treatment – shall be coded “M.” For instance, if the business an FIP is engaged in belongs to Type 1 under Encouraged Category I in the “2011 FDI Catalog,” the “Policy Item” shall be coded M 0101.

If an FIP is approved/filed before January 30, 2012 and included as “encouraged” in the “2007 FDI Catalog,” it can still go through procedures for import customs duty exemption in accordance with the regulations. The entity handling the FIP shall take related documentation – including the “Project Confirmation Letter” (the “Policy Item” coding shall follow the 2007 standards) – to the Customs department before January 30, 2013 to apply for the filing of tax exemption/reduction. Applications will not be accepted beyond that date.

If an FIP is approved/filed before January 30, 2012 and included as “encouraged” in both the 2007 and 2011 FDI Catalogs, its application for tax exemption/reduction filing can still be accepted if its “Policy Item” coding in the “Project Confirmation Letter” follows the 2011 standards.

If an FIP is newly included as “encouraged” in the 2011 FDI Catalog, it can apply for the “Project Confirmation Letter” from the local departments in charge of investments. Upon receipt of the letter, the project will gain eligibility for the favorable tax treatment stipulated in this announcement. However, taxes imposed on its previous imports of equipment for self use will not be refunded.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, India, Singapore and Vietnam. To contact the firm please email asia@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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