Most people believe that the best way to enter China is through a free trade zone. This type of entry has been well-liked in China for several years. While there are many advantages to establishing a free trade zone, it is essential to consider the benefits as they affect your business. This article will go over some of the most crucial issues surrounding the possibility of establishing a free trade zone in China:
What is a Free Trade Zone?
A Foreign Trade Zone (FTZ) is where businesses adhere to regulations explicitly set for the area. In FTZs, the companies operate as distinct firms in other regions. Typically, firms will be granted flexibility in customs duties and provided with favorable arrangements for handling imports and handling.
The FTZ regulations and goals in China have changed over time to meet the demands and demands of the Chinese economy. To decide if a move to the FTZ is the right choice for your business, it is essential to comprehend the original motive behind FTZs and how they have changed.
In the past, free trade zones were created to promote international trade between China and foreign countries and aid in marketing foreign businesses inside China.
A few examples that show how it was accomplished include the duty-free import and export and the practicality of the concept of warehousing. The first zone operated this way was established by Shannon, Ireland, in 1959.
While the initial design of FTZs remains in use in China, many more features have been included to better reflect the current financial climate in China.
Free Trade Zones throughout the globe, with a particular focus in China, is used to test new economic policies before they are put into place at a national scale. Because this zone is usually tiny and closely monitored, It is an ideal test ground for procedures that could alter foreign exchange rates and taxes.
First, the first free trade zone ina was set up in Shanghai in September 2013. In addition to having access to advantageous export and import policies, these companies also used a more straightforward company application process and foreign exchange. Taxes were also imposed for specific sectors.
Where are the free trade zones in China?
Following the initial FTZ in Shanghai 2013 in 2013, the Chinese government quickly created zones conducive to its growth. China now has 11 FTZs throughout the country.
The trade zones of the new regime don’t necessarily intend to test changes. Instead, the three areas (Fujian, Guangdong, and Tianjin) were put in place to follow Shanghai FTZ Shanghai FTZ aimed to provide the space needed for specific industries and encourage regional trade.
Particularly:
- Due to its position within Southeast China, the FTZ located in Fujian is specially designed to facilitate commerce with Taiwan and manufacturing high-tech;
- The FTZ is located in Guangdong and is focused explicitly upon trade and commerce in conjunction with Hong Kong due to its proximity.
- The FTZ located in Tianjin offers the possibility of trading in Northern China and financial markets situated offshore.
In 2017, the Chinese government created seven New Free Trade Zones. Since starting the four original zones, China has been working on new zones. The Chinese administration has put its sights on developing and implementing new policies. One of these is the “One Belt, One Road, “One Belt, One Road” initiative, designed to increase the trade relationship among Central Asian and Eurasian countries and encourage trade on a brand emerging Silk Road.
New FTZs are typically located in the south of China, which is a strategically vital position for trade. The new zones include Liaoning, Sichuan, Zhejiang, Henan, Shaanxi, Hubei, and Chongqing. More zones are planned to be developed in different locations, such as Hainan Island.
The considerations for businesses
As we’ve mentioned before, the changes to the structure of modern FTZs generally align with the local priority areas. The initial idea behind FTZs was to eliminate trade barriers. However, that may not be the only reason for them in present-day China. Other reasons for FTZs typically include testing the waters, a specific focus on industries or as a channel to trade with neighboring regions.
Because each zone has a particular area of focus, each location can offer distinct advantages for companies considering moving into these zones. This means that the previously available benefits in the same area may be altered based on the changing priorities.
Even though companies might still be interested in the primary advantages offered by FTZs, it is also possible that businesses will discover more benefits and advantages when taking a look at the features of each FTZ.
Why should foreign firms establish themselves in an FTZ?
We’ll go over the numerous advantages of China’s free trade zones. As mentioned previously, the benefits may be altered over time.
Storage in warehouses and imports duty-free
The initial incentives of free trade zones are still a significant consideration for numerous companies. They allow imports without paying additional taxes or duty-free and then store them locally in warehouses. Products distributed in the domestic market without the FTZ will continue to enjoy duty-free status when they travel throughout the supply chain.
A streamlined process for customs
The main benefit of FTZs is the ease of customs procedures. Businesses can anticipate electronic declaration procedures and more efficient customs inspections when necessary. This could mean substantial reductions in time and cost.
Lenient Foreign Exchange
In contrast to businesses operating outside Free Trade Zones (FTZs), companies located in FTZs can open Free Trade Accounts. These accounts can be used to accept Renminbi (CNY) in addition to foreign currencies and can convert balances with no restrictions. In other regions in the nation, conversion between proportions has been approved and monitored by SAFE (State Administration for Foreign Exchange). This policy could soon be extended to other regions, but it will have to be implemented in FTZs.
The possibility of having a more straightforward business setup
The procedures for setting up companies are continuously being improved to allow businesses to join FTZs. Furthermore, governments often adopt policies within FTZs initially, which they plan to roll out across the country and serve as a controlled trial to test the approaches. WFOE Registration within FTZs is an example of a method that has witnessed substantial improvements compared to regions that aren’t FTZs. Although the procedure for setting up is identical across the entire country of China, it is still possible to gain benefits from any new policy first in FTZs.
Specific industry clusters
Being located inside one of the FTZs specifically for a particular sector would be advantageous to businesses in the industry. They can benefit from certain benefits only available to companies in the same industry. For instance, certain FTZs may offer concessions, at least in the beginning, to encourage investment from specific industries.
As we’ve previously mentioned, each free trade zone typically works in a specific business, that is, with Shanghai focused on finance and services. Tianjin on leasing and finance, Guangdong on manufacturing and financial services, Henan on e-commerce and automobiles, and Fujian and Sichuan emphasize high-tech manufacturing.
In addition, a business’s image could be affected by its location within a particular FTZ. Firms that can be a part of an FTZ specific to their industry of interest can get concessions and boost their status in that sector.
For instance, a financial WFOE in Shanghai’s Lujiazui will be viewed differently from one that operates in Chengdu.
Tax laws for Free Trade Zones
While certain FTZs might offer tax reductions for specific industries, they are not long-term and shouldn’t be relied upon to develop a long-term strategy. Taxation rates are usually the same for companies operating within and outside a Free Trade Zone.
Below is a listing of the most recent and ongoing tax breaks:
- Guangdong and Fujian FTZ, Reduced Corporate Income Tax for encouraging industries in specific sub-regions.
- Guangdong FTZ Macau and Hong Kong residents can claim refunds on their tax up to their local tax rate.
- Products sold within FTZs benefit from VAT exemption policies.
Things to consider before the setting up of a WFOE in the form of a Free Trade Zone
Free Trade Zones are a great source of benefit for companies planning to establish their operations in China. Businesses must take into consideration the advantages offered by each FTZ and keep track of the benefits over time to be aware of any changes that might be forthcoming. Companies must plan to keep up their study by contacting local authorities and a service company that could assist within any FTZ.
Anyone who could benefit from more minor complicated customs and import/export procedures should consider applying to a Free Trade Zone. The location of an FTZ that is focused on a specific sector can provide advantages over rivals. For instance, businesses in manufacturing and logistics are usually attracted to China’s FTZs.
Companies seeking to reduce expenses, more efficient administrative processes, or tax incentives need to be cautious. While it is true that beneficial initiatives are typically first introduced within FTZs, they may be extended to the whole country in the future or be altered. Other factors to be considered include the expense of operations, the availability of suppliers in the area, and the proximity to customers.
Author information: FDI China
FDI China is a non-state-owned agency with its headquarters in Shanghai that assists foreign businesses to establish and maintain their presence within China. Chinese market FDI China helps foreign firms beginning with employment solutions, representative office and WFOE registration in China, and advanced stages that include payroll and accounting assistance.