The Shanghai Pilot Free Trade Zone

The Shanghai Pilot Free Trade Zone was established in 2013 to enhance China’s economic reform by liberalizing the RMB. It is intended to boost trade and meet international standards in terms of taxation thereby loosening restrictions on foreign investment in China. Mr Ai Baojun, Shanghai’s Vice Mayor was appointed head of the zone. It went through several stages before being officially approved by the State Council.

Overall description

It is located in the Pudong new area of Shanghai. It initially covered an area of 28.78 square kilometers with 4 distinct areas:

It later was expanded to Lujiazui Financial Area (34.26 sq. km.), Jinqiao Export Processing Zone (20.48 sq. km.) and Zhangjiang High Tech Park (37.2 sq. km.) to finally cover a total area of 120,72 sq. km.

The zone aims at enhancing investment and innovation throughout new policies such as implementing new forms of trading in order to promote RMB convertibility on the long term. RMB convertibility will first be promoted for capital account items thereby opening up the financial sector to foreign firms and multinationals. In addition, administrative procedures and customs monitoring on goods will be loosened in order to promote the opening of the service sector in general. In order for this to be implemented smoothly, firms will be closely supervised by the government after their registration instead of being simply subject to the authority’s approval.

Relevant regulations:

General Foreign investment Outbound investment Administration on business registration

Laws and measures adjusted

General plan

Administrative measures

Special treatments

Record filing of foreign invested firms + projects

Record filing of firms in the FTZ investing abroad firms + projects

Supporting the development of the FTZ

Approval of the use of the new template of business license

Key impacts on investors and multinationals

Investment opportunities will be broadened:

Indeed, administrative burden will be relaxed for investment

The zone introduces the national treatment pre-establishment mechanism. Firms that aren’t in the Negative List will only be subject to initial registration whereas other firms will still need to go through approval procedures. The new zone strongly encourages outbound equity investments and Fund to Fund.

Custom supervision will be relaxed:

International transport procedures for imports and exports will be relaxed. For instance, imported goods will be allowed in the zone before having to be declared to customs and bonded goods will be allowed to be traded directly.

Tax incentives:

Promoting investment via installment plan for income taxes Promoting trade via export tax refund and import level VAT

Asset appreciation

During a 5 year period, firms can pay a related income tax by installments for an asset restructuring transaction or an appreciation of non-cash assets used as investments.

Exemptions of import-level VAT apply for aircrafts >25 tons and leased to domestic airlines

Exemptions of customs duty / import-level VAT / import-level consumption tax apply for machinery and equipment imported by manufacturing firms.

Stock incentives

Talents receiving stock options in the form of share stock or capital contributions are allowed to pay related IIT by installment.

Pilot export tax refunds are granted to finance lease businesses

Promotion of foreign trade:

Remaining uncertainties

However, the amount of firms registered remains insufficient.  This is due to several remaining limitations and uncertainties for investors:

  • No clear timeframe for RMB convertibility
  • PRC approval still required for accounts to be settled in the zone
  • Prohibition of Joint Venture securities firms with more than 50% of foreign shareholding
  • Prohibition of the establishment of firms by brokers
  • Prohibition of free trade accounts preventing investors to participate in listed bond markets

The zone contributes to the development of a stable financial system in order to build sustainable and balanced growth by promoting international cooperation. Guangdong, Fujian and Tianjin PFTZ exemplify the continuity of the process aiming at making these zones international hubs in terms of trade and foreign investment. 

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