Hainan Free Trade Port Law: Building a Law-Based Business Environment
China’s new Hainan Free Trade Port Law is part of its ongoing efforts to develop Hainan Island into a globally influential free trade port. The law lays the legal foundation for the construction of Hainan FTP and offers the region greater autonomy for delivering on comprehensive reforms and market opening.
On June 10, 2021, the Standing Committee of the 13th National People’s Congress adopted the Hainan Free Trade Port Law of PRC. The law took effect immediately.
This came just one year after China released a masterplan last June that laid out a series of policies, which unveiled the roadmap for Hainan to be transformed into a world-leading free trade hub like Hong Kong and Singapore.
Beijing has realized that for this to happen a credible rule of law systems is essential for Hainan, which is why work on formulating necessary legislation has been in full swing. The promulgation of Hainan Free Trade Port Law aims to convert existing policy incentives into legislative reality, provide legal guarantees for various future reforms, and enhance the confidence of investors, especially foreign investors.
Highlights of Hainan Free Trade Port Law
The Hainan Free Trade Port Law comprises eight chapters covering all the areas involved in the port’s construction, including the liberalization and facilitation of trade and investment, fiscal and taxation systems, environmental protections, industrial development and talent support, and other comprehensive measures.
Liberalization and facilitation of trade
The Law guarantees to “establish a special customs supervision zone system of Hainan Free Trade Port (FTP) for independent customs operations throughout Hainan Island”.
According to the masterplan, for cross-border trade in goods, Hainan FTP will set up a “first line” to overseas countries and regions, and a “second line” to the Chinese mainland.
In principle, the first line will be open – goods (except those on Hainan’s prohibitive or restrictive lists) can be freely imported and exported between overseas regions and Hainan FTP under customs’ special supervision.
And the second line will be more tightly controlled – goods entering the Chinese mainland from Hainan will go through procedures in accordance with relevant import regulations, customs duties, and taxes.
For cross-border trade in services, Hainan will adopt a negative list management system for cross-border trade in services – beyond the negative list, domestic and foreign market entities should be equally treated. Besides, Hainan will also implement the fund payment and transfer system that matches the cross-border trade.
Liberalization and facilitation of investment
Investment-wise, based on the Law, Hainan will launch the “most-streamlined-approval system” for investment, implement simplified negative list for foreign investment and special measures for relaxing market access, and gradually adopt the “system of market access upon commitment”.
Last December, Hainan rolled out a new negative list for foreign investment access in the FTP. The negative list, implemented from February 1, 2021, expanded market access to foreign investment in various sectors, such as telecommunications, education, business services, manufacturing, and mining, in Hainan FTP.
Fiscal and taxation systems
The Law also supports Hainan FTP to establish its own taxation system – based on the masterplan, the taxation system will stick to the principles of “zero tariffs”, “low tax rates”, and “simplified tax regime”.
China aims to launch island-wide independent customs operations and implement a simplified tax regime in Hainan by around 2025.
Before that time, some goods imported from overseas subject to list management (one zero-tariffs negative list and three positive lists) can be exempt from import duties, value-added tax (VAT), and consumption tax.
After 2025, all goods imported from overseas will be exempt from import duties, except for those listed in the to-be-formulated Negative List of Commodities Subject to Import Taxes and goods prohibited from importing into Hainan by law.
To be noted, goods entering the mainland from Hainan FTP will still be subject to import tariffs. That said, goods produced by encouraged industrial enterprises that do not contain imported materials or contain the imported materials but reach a certain proportion of value-added processing in Hainan FTP will be exempt from import tariff.
In turn, for goods entering into Hainan FTP from the mainland, VAT and consumption tax that were levied can be refunded pursuant to the relevant provisions.
Low tax rates
The Hainan FTP Law reiterates favorable corporate income tax (CIT) and individual income tax (IIT) policies in Hainan, although it does not make specific provisions for tax rates.
According to the masterplan, enterprises registered in Hainan and engaged in substantive business activities in encouraged industry sectors will be taxed at a reduced CIT rate of 15 percent by 2025, compared with the normal rate of 25 percent.
After 2025, this policy will be expanded to all industry sectors (except those on Hainan’s investment negative list).
In addition, for high-end talents and talents in short supply working at Hainan FTP who meet certain criteria, the portion of their actual IIT burden exceeding 15 percent will be exempt. After 2025, Hainan FTP will continue to reduce IIT rates to 3, 10, and 15 percent (three tax brackets) for eligible talents’ taxable income earned in Hainan, but qualified foreign or Chinese talents must reside there for no less than 183 days per year.
Simplified tax regime
The Law stipulates that indirect taxes and fees on Hainan Island, such as VAT, consumption tax, vehicle purchase tax, urban maintenance and construction tax as well as education surcharges should be streamlined into one sales tax to be levied at the retail point of goods and services. This will be implemented when the island starts its independent customs operations, following which Hainan will further simplify its overall tax system in the future.
What’s more, the Law puts forward the strictest ecological and environmental protection system, implementing the one-vote veto system for environmental protection and lifelong accountability for damage to the ecological environment.
Industrial development and talent support
The Hainan FTP Law re-emphasizes developing Hainan into an international tourism consumption center, pushing for the deeper integration of tourism, culture, sports, medical care, pension, and healthcare, etc. This includes developing Hainan’s medical tourism. China continues to develop a 20-square kilometers medical tourism zone in Boao with 16 medical facilities.
Besides, to attract and cultivate a strong talents market in Hainan, a more convenient visa policy will be implemented for foreign talent and expatriates. High-level overseas universities and vocational colleges may establish schools of science, engineering, agriculture, and medicine in Hainan.
Other comprehensive measures
Furthermore, the Law also called for establishing a cross-border fund flow management system that meets the needs of high-level trade and investment liberalization and facilitation and promises to open up the capital account by stages, gradually making the foreign debts of nonfinancial enterprises fully convertible.
Hainan FTP: Pioneer in China’s systematic reform
The implementation of the Hainan FTP Law undoubtedly demonstrates China’s firm determination to open wider to the outside world and promote economic globalization.
During the early stages of China’s reform and opening up, the country gradually experimented with new projects first and built laws based on their outcomes. As a new region undergoing comprehensive and deepening reform at rapid pace, Hainan is at the forefront in this sense. Unprecedently, the Hainan FTP Law offers Hainan greater autonomy for delivering on comprehensive reforms and marketing opening.
Domestic and foreign investors who are interested in setting up in Hainan can take full advantage of Hainan FTP’s preferential policies by evaluating how these can align with their own business development strategies.
Dezan Shira & Associates has been paying close attention to the development of Hainan FTP and its preferential policies on trade facilitation, import and export duties, customs supervision, and financial reforms. For more information, please contact us for assistance at China@dezshira.com.
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