China’s State Council has just made public a notice (Circular 25) dated 10 May 2015, clarifying a few preferential policy issues.

The new notice is a follow-up to a late 2014 State Council circular (Circular 62) that required local governments to ‘clean up’ preferential investment policies and eliminate those that did not comply with central government policies, from preferential land pricing to local tax refunds. Local governments were required to report the status of such policies to the central government by the end of March 2015.

As a result of Circular 62, local governments who had offered tax and non-tax incentives as part of their efforts to attract outside investment into their area were forced to put these incentives on hold, including any incentives that were set forth in investment contracts signed with investors.

This raised concerns that these incentives would be retroactively invalidated, even though they were negotiated in good faith and agreed to by local governments in existing investment contracts.

The newly issued notice, however, confirms that certain incentives in existing investment contracts will continue to be effective and will be honoured.

A few highlights of the new notice:

  1. Preferential policies provided in existing contracts between the local governments and companies will continue to be effective.
  2. Preferential policies with a finite term already made public by local governments will remain effective throughout that term. 
  3. Preferential policies without a finite term already made public by local governments will need to be adjusted, but a specific transition period will be given. The preferential policies will remain effective in the transition period. 
  4. New policies relating to taxes or non-taxable income should be approved by the State Council before implementation, unless they are permitted by law or administrative regulations. Government funding generally should not be tied to a company’s taxes and non-taxable income. 
  5. The ‘clean-up’ work required by Circular 62 will proceed after arrangements have been made in the future. This seems to suggest that the ‘clean-up’ authorised under Circular 62 will be on hold indefinitely