China Processing Plants to Enjoy Tax Exemptions after Converting to FIEs

Posted on by Dezan Shira & Associates

China has recently clarified that import value-added tax (VAT) and custom duty exemptions can be granted for non-priced equipment imported by outward processing entities (OPEs), when these entities obtain a legal personality as a foreign-invested corporation (FIC) and meet other related criteria.

According to Announcement No.7 issued by the General Administration of Customs (GAC) on February 28, China offers favorable tax treatment to OPEs under the following circumstances:

  • Where an OPE without a legal personality establishes a corporation (an enterprise with legal personality) between July 1, 2011 and December 31, 2012 with all its foreign-provided non-priced equipment as investment, or where the OPE transfers all its non-priced equipment as investment into a corporation (established by the same foreign investor of the said equipment) between July 1, 2009 and December 31, 2012, its non-priced equipment is exempt from backdated payments of customs duty and import VAT. However, this only holds true if it was filed with the customs department in its Processing Trade Manual (PTM) before December 31, 2008, declared as imported equipment before June 30, 2009, and is still under customs supervision.
  • Where an OPE without a legal personality has already converted to a corporation between September 9, 2008 and June 30, 2009, its non-priced equipment is regarded as investment instead of import and exempt from backdated payments of customs duty and import VAT. However, this only holds true if it was already transferred under the corporation’s ownership and is still under customs supervision.

In order to enjoy the aforementioned tax exemption, an FIC shall make a one-time application before December 31, 2012 for tax reduction and exemption on all its relevant non-priced equipment. After the FIC obtains approval for its application from the customs department in charge, it shall go through related tax exemption/reduction procedures in accordance with the “Administration of Tax Reduction and Exemption on Import/Export of Goods (GAC Decree No.179).”

The monetary amount declared during the tax exemption/reduction procedures will be counted as part of the FIC’s total investment and shall not exceed the equipment’s price declared when it was imported. In addition, the calculation of the customs supervision period for relevant non-priced equipment shall be carried forward.

If an OPE has filed its non-priced equipment in the PTM before December 31, 2008, and has transferred part of its declared equipment to the same corporation that invested the equipment on and before June 30, 2009, the OPE shall transfer all the rest of its non-priced equipment into the corporation before December 31, 2012, in order to enjoy the aforementioned customs duty and import VAT backdated payment exemption.

If a newly-established FIC engages in industries encouraged in the Foreign Investment Industrial Catalog or the Catalog of Encouraged Foreign-Invested Industries in Middle and Western Areas, its carry-over procedures of non-priced equipment is exempt from customs duties if the equipment is:

  • Filed in the PTM on and after January 1, 2009; or
  • Filed in the PTM before December 31, 2008 but declared as import after July 1, 2009

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