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Why Enter Shanghai’s Free Trade Zone?

Free Trade Zones (“FTZs”) in China has welcome foreign companies where they can access one of the biggest markets in the world. Over time, China has been adding preferential policies to make the FTZs more and more appealing, each zone having its individual and unique characteristics. Now China has around 21 FTZs, including in Beijing. Each has started to specialise to compete for international investments, businesses and entrepreneurs, which is good news for anyone wanting to do business in China.

Shanghai’s FTZ (“SHFTZ”) has been of particular interest since its establishment in September 2013. It was the first to be established in China and is gradually being aligned to be less export-oriented and more services-oriented following the national plan. To make matters interesting before entering an FTZ, one must pay careful attention to China’s Negative List, which identifies activities that international investors are prohibited from investing or are restricted but will have certain conditions, but the FTZs have less prohibited or restricted industries as they have their own negative lists, which are generally more positive lists, as is the case in the SHFTZ.

How to Register the Business in Shanghai’s FTZ?

Registering in SHFTZ takes about one month, as the process for registering has been streamlined between different departments (some cite five days but in reality, it will take some time to arrange all of the documentation). Maintenance of the business from a compliance perspective in the SHFTZ is easier as well than outside of the SHFTZ. For a quick and easy registration, a virtual office can be allowable in the SHFTZ, with a business later considering a formal office once it starts to trade fully. During Covid a lot of companies have been getting set up and established in the SHFTZ, so that they are ready for post Covid times.

What Benefits can a Business Expect in Shanghai’s FTZ?

Businesses that establish themselves in SHFTZ can benefit from duty-free import and warehousing within the zone, allowing overseas goods to arrive in China and duty be paid only when leaving the SHFTZ or sold in the SHFTZ. This is also enticing thanks to the simplified customs procedure, fully digitalised, saving time and money.

Foreign Exchange controls allow a company in SHFTZ can establish a Free Trade Account (FTA). The FTA allows a company to receive and convert Renminbi and other currencies more easily, overcoming SAFE administration (State Administration of Foreign Exchange).

Overseas parent companies of the operations in the SHFTZ can issue RMB bonds in the domestic capital markets following national laws and regulations. Individuals employed in the FTZ can open non-resident inbound investment accounts in the FTZ to engage with inbound investment, including security investments, while allowing to invest in “A” share market without being in the Qualified Foreign Institutional Investor (QFII) program

Industry Specific Benefits

Those involved in the E-commerce and online data processing industry can specifically benefit from the relaxed restriction on the equity ratio of foreign investments. While expanding, the foreign investors in SHFTZ can invest 100% in the E-commerce and online data processing company operating in the SHFTZ.

Financial sector securities companies and securities investment fund management can have a 51% portion of foreign shares. While in the Automotive industry, it is possible to have more than a 50% stock ratio for vehicle manufacturing, and foreign companies can establish Joint Ventures with more than two similar vehicle products in China.

Shanghai FTZ Tax Benefits

Investors injecting non-monetary assets as capital into the companies located in the SHFTZ can average the premium from the appreciation of the assets over five years for China Enterprise Income Tax (EIT) purposes. This benefit allows for the EIT liability to be put off, perfect for cash flow management, especially during tight financial situations.

Lastly, individual talents or professionals with a share-based payment method can enjoy preferential Individual Income Tax (IIT) treatment when the payment is made in instalments within five years. However, it is essential to note that specific requirements have to be met to enjoy that particular IIT benefit.

Final Considerations

Even though establishing an office in Shanghai’s FTZ is very beneficial, the policies can frequently change as the FTZs are used as experimental hubs for regulations or benefits, which will generally be applied across the country. Therefore, it is best to carefully examine what kind of structures is best for the long term strategy of the company within China.

How can LehmanBrown Help?

LehmanBrown International Accountants has been operating in Shanghai for nearly two decades, helping companies in Shanghai, the original zone and now the SHFTZ.

If you are interested in registering in Shanghai’s FTZ or would like to consider other FTZs, please feel free to contact LehmanBrown via email: enquiries@lehmanbrown.com.

Alternatively, stay updated about what China has to offer by signing up to the LehmanBrown newsletter, which shares the latest policies and advice by emailing: newsletter@lehmanbrown.com

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