China Free Trade Zones (FTZ) | WFOE vs WFOE FTZ
China Free Trade Zones have been a popular location choice for foreign companies in China for several years. The reasons and advantages for doing so however are not always so clear to those considering setup in China. In this article, we look in more detail at China’s Free Trade Zones:
- What are Free Trade Zones and where are they?
- Why were Free Trade Zones created in China?
- Why locate a WFOE in a Free Trade Zone?
- The changing and evolving benefits of Free Trade Zones
What is a China Free Trade Zone?
A Free Trade Zone (FTZ) is an economic zone where companies can operate under specially defined regulations. In particular, they offer preferential customs handling and initial import without paying duties.
To understand the current situation with FTZs in China and how they can be best used as part of WFOE setup strategy, it is important to understand their evolution and role in China.
Traditionally, a free trade zone has been used to facilitate import-export and international trade, offering duty-free import, export, and warehousing. The first such zone globally was established at Shannon airport in Ireland, to encourage trade at this transit location.
To a certain extent, Free Trade Zones in China still follow this original structure but have also taken on an expanded meaning. China additionally uses FTZs as a testing ground for new policies – tax, regulatory or foreign exchange for example. Introduction in a single, tightly controlled, region allows tests and development of such policies before considering nationwide expansion.
Shanghai Free Trade Zone was the first in China, set up in September 2013. Companies here were offered preferential import-export policies and a chance to benefit from new initiatives such as a streamlined company application and simpler foreign exchange. There were also some initial tax concessions for certain industries.
Where are China’s Free Trade Zones?
Since 2013, the FTZ concept has expanded greatly and China currently has 11 Free Trade Zones across the country. Whilst the Shanghai FTZ was mainly focussed on experimentation with national reforms, the next 3 to be setup in Fujian, Guangdong and Tianjin were more aligned with regional trade and specific industries:
- The FTZ in Fujian supports trade with Taiwan, and focusses on high tech manufacturing
- The FTZ in Guangdong supports trade and integration with Hong Kong
- And the FTZ in Tianjin is focussed on Northern China as well as offshore financial markets
In 2017 these original 4 zones were joined by 7 new ones. The approach here was different, and reflects the development focus of the Chinese government. These zones are located in regions that can benefit from the important “One Belt, One Road” initiative to encourage Central Asian and Eurasian connectivity and trade along the old Silk Road. These FTZs are in Liaoning, Zhejiang, Sichuan, Chongqing, Henan, Hubei and Shaanxi. Plans are underway to develop others as well, for example Hainan Island.
Changing advantages – not what they used to be?
Free Trade Zones in China have certainly expanded beyond the original concept of lower barriers to import, export and international trade. They are used as a testing ground for reform and as a conduit for regional trade in certain industries. As such they often have quite specific incentives and advantages. And as is the nature of business in China, these can change frequently depending on local priorities.
Whilst for some companies, the benefits of duty-free initial import and warehousing remains key, others should carefully consider all advantages before choosing to set up in a particular FTZ.
Benefits of setting up a company in a FTZ
So, what are the China Free Trade Zone benefits? We list here the main ones to consider, bearing in mind that these can change between regions and over time!
- Duty-free import and warehouse storage. This was one of the original principle benefits of Free Trade Zones and remains important for many companies. Goods can be imported duty-free and stored in FTZ warehouses. Duty will then be levied further down the distribution chain if the goods are shipped on domestically outside the FTZ.
- Simplified customs procedures. As well as a delayed duty payment, FTZs often offer a faster, simpler customs process. Customs inspections, when required, are faster and declaration processes are streamlined and fully computerized. In a bureaucratic country like China, the time and cost savings here can be significant.
- Relaxed Foreign Exchange Controls. Companies located in many of the FTZs are able to set up Free Trade Accounts (FTA). These can receive both Renminbi and foreign currencies, and balances can be freely converted. In other locations, such conversions require the approval of SAFE (State Administration of Foreign Exchange), but this is changing quickly as this policy expands nationwide
- Potentially simpler company set up procedure. In the recent past, some of the FTZs (especially Shanghai) have seen significant improvements in China WFOE registration and setup as compared with non-FTZ locations. It is common to use FTZs as a testing ground for such reforms, giving these companies temporary advantages over other locations. Currently, the setup procedure is very similar across FTZs and other locations in China.
- Industry business clusters. An attraction of FTZs for many companies is the focus on certain industry sectors. Many FTZs aim to attract investment from certain industries or sectors, often offering them (at least initially) specific concessions. For example, Shanghai focusses on financial services, Guangdong on manufacturing and also financial services, Fujian and Sichuan on advanced manufacturing, Henan on automobiles and e-commerce, and Tianjin on cross border financing and leasing.
There are business and economic efficiencies to be gained from being located within a relevant cluster. Don’t forget as well that brand and image in China are often closely linked with a location. A financial WFOE based out of Shanghai Lujiazui FTZ, for example, will present a very different image from one registered in Chengdu.
- Tax provisions for Free Trade Zones. In general, taxation levels are the same for companies in an FTZ and elsewhere. There are sometimes tax discounts or incentives for specific industries offered by certain FTZs, but these change often and should not be relied upon for long term setup.
Some examples of current and recent tax concessions include:
- Reduced Corporate Income Tax for encouraging industries in certain subregions of Guangdong and Fujian FTZ.
- Hong Kong or Macau residents working in parts of Guangdong FTZ can claim Individual Income Tax rebates equivalent to their home taxation levels.
- VAT exemption policies for goods sold within FTZs.
Considerations before WFOE registration in a Free Trade Zone
Whilst Free Trade Zones can certainly offer advantages to some companies, these should be carefully considered beforehand. It is worthwhile investigating both with the local authorities and with an informed service provider what is, and will be, offered in any FTZ location of interest. And it is important to take a long term view of these benefits.
Companies that can benefit from simpler import and customs procedures will certainly see advantages. Logistics and manufacturing hubs, for example, have often been attracted by FTZs. Being located in an industry focussed area, and alongside other companies can also have a strong appeal.
Those that are looking more for lower costs, tax incentives or simpler administrative processes should consider carefully. Whilst some of these initiatives are trialed out, or offered temporarily, in an FTZ they typically change over time and often expand to the whole country. Other considerations such as proximity to customers, suppliers or partners, or overall cost of operation, might be more important than simply FTZ location.
The information contained in this article is valid on July 11th, 2018. For updated information, please contact us via email at firstname.lastname@example.org.