Understanding Investment Trends in China’s Bonded Zones

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SHANGHAI – The General Administration of Customs (GAC) recently announced that all of China’s Special Customs Supervision Zones (SCSZs), which previously fell under six different categories, will be uniformly renamed as “Comprehensive Bonded Zones” (CBZs) later this year. Not only will the SCSZs be changing names, but also their basic function. The new CBZs are expected to serve enterprises engaged in bonded processing, bonded logistics and bonded services.

Since 1990, 113 areas have been approved as SCSZs to meet the needs of economic development in China. These areas fall under six categories, namely bonded zones, export processing zones, bonded logistics parks, cross-border industrial zones, bonded port zones and comprehensive bonded zones – each serving different enterprises and business activities. However, a lack of readily-available information regarding the specific functions of each zone has made it difficult for foreign investors to choose the right location for their business operations. The GAC also stated that not all enterprises will be permitted to operate in the CBZs.

In the “Guidelines on Projects Suitable for Entry into the Special Customs Supervision Zones (SCSZs) (Shujiafa [2012] No.196),” three categories of enterprises are highly encouraged to do business in the CBZs:

1. Bonded processing enterprises conducting any of these major types of transactions:

  • Sourcing raw materials from Chinese non-bonded areas;
  • Sourcing raw materials from overseas;
  • Selling finished goods overseas; and
  • Selling finished goods to Chinese non-bonded areas.

The processing enterprise’s target market will determine what kind of preferential policies apply. If the enterprise is selling to the domestic market, for example, the customs duty on the finished goods must be lower than the duty on the imported raw materials. This means that processing enterprises should avoid high consumption rate products such as tobacco, cosmetics and luxury goods.

RELATED: China Announces Preferential Policies for Three Development Zones

2. Bonded logistics enterprises conducting any of these major types of transactions:

  • Importing goods stored in the bonded zones without a time limit;
  • Importing goods to be transferred between CBZs;
  • Packaging and assembly of imported goods;
  • Transporting imported goods to Chinese non-bonded areas; and
  • Transporting imported goods to foreign countries after basic processing.

3. Bonded service enterprises providing any of these major services:

  • Research, testing, and maintenance;
  • Exhibiting imported goods in special areas inside or outside of the bonded zones approved by Customs; and
  • Outsourcing, including Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO).

Four categories of enterprises are not permitted for operations in the bonded zones:

  • Manufacturing and processing enterprises that (1) are oriented to the domestic market and (2) make products whose import duty is higher than the duty on the related raw materials. As a result, high consumption rate products such as tobacco and cosmetics cannot be processed in the zones.
  • Enterprises mainly operating a non-bonded business, which concerns goods sourced from the domestic market or imported via general trade.
  • Manufacturing enterprises focused on domestic raw materials and high export duty products (or controlled export products).
  • Manufacturing enterprises processing high energy consumption or high pollution products, or other products prohibited by the government.

The following preferential tax policies apply to enterprises operating in the zones:

  • Import tariff exemptions apply to machinery, equipment and other materials used in infrastructure construction, a reasonable quantity of office supplies, and spare parts used for maintenance.
  • Import goods brought into the zones may be exempt from import tariffs.
  • Goods traded between enterprises in the bonded zones are exempt from VAT and consumption duties.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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