On June 27, 2012, the State Council issued its Reply of the State Council on Policies Supporting the Development and Opening-up of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (the “Reply”).(5) The Reply took effect as of the date of its issuance. The Reply sets forth certain policies and tax incentives to support the development of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone.

  1. Background

In 2008, the State Council approved the Qianhai area for the establishment of a bonded harbor zone. By the end of 2010, the State Council approved the creation of a Shenzhen-Hong Kong Modern Service Industry Cooperation Zone within Qianhai (the “Qianhai Zone”).

The Qianhai Zone is a roughly 15-square-kilometer area located in the western part of Shenzhen near Hong Kong. According to the Qianhai Shenzhen-Hong Kong Modern Service Cooperation Zone General Development Plan drafted by the Guangdong Provincial Government and approved by the State Council in 2010, Qianhai was chosen to cooperate with Hong Kong in providing modern services, such as financial services, trading, logistics, supply chain management, shipping, accounting, legal and entertainment services, etc.

The State Council’s Reply sets forth more detailed policies to be applied in the Qianhai Zone in order to encourage the development of relevant modern service industries and stimulate cooperation between Shenzhen and Hong Kong. The Reply identifies certain service industries to be opened up to Hong Kong investors or practitioners under the Mainland and Hong Kong Closer Economic Partnership Arrangement (“CEPA”) framework and establishes favorable policies to be applied to companies registered in the Qianhai Zone.

  1. Favorable Policies

The Reply indicates that favorable policies will be implemented to encourage development in the Qianhai Zone, including specific measures with respect to the following:

  1. Financial Services
    1. Ways will be explored to broaden the channels for repatriation of overseas RMB funds.
    2. Banking institutions established within the Qianhai Zone will be permitted to grant RMB-denominated loans to overseas projects and studies will be made to explore the feasibility of allowing Hong Kong banking institutions to grant RMB-denominated loans to enterprises or projects within the Qianhai Zone.
    3. Qianhai Zone-registered enterprises and financial institutions will be permitted to issue RMB-denominated bonds in Hong Kong.
    4. Equity investment funds, including “fund-of–funds,” may be formed in the Qianhai Zone.
    5. Hong Kong financial institutions will be welcome to set up branches and develop financial business in the Qianhai Zone with a lower investment threshold.
    6. Hong Kong institutions and other domestic and foreign financial institutions will be encouraged to set up worldwide or regional headquarters in the Qianhai Zone.  
  • According to the Reply, detailed implementing rules regarding the above financial services policies will be issued by the relevant governmental agencies.
  1. Tax Incentives
    1. Corporate income tax – A 15% corporate income tax rate will be applied to qualified enterprises according to an industry entry catalogue and a preferential catalogue, which will be issued by the National Development and Reform Commission and the Ministry of Finance.I
    2. Individual income tax – Qualified foreign individuals and professionals in short supply working in Qianhai will receive an individual income tax (“IIT”) rebate to cover the difference between the Chinese IIT rate and the foreign IIT rate that would apply if they work overseas, and such rebate will be exempted from IIT. 
    3. Business tax – Qualified logistics companies registered in the Qianhai Zone will have business taxes levied based on their net business revenue.
  2. Legal Services
    1. Hong Kong arbitration institutions will be permitted to set up branches in the Qianhai Zone.
    2. Closer cooperation between Mainland lawyers and Hong Kong lawyers will be encouraged, including the potential creation of joint ventures between Mainland and Hong Kong law firms.
  3. Foreign Talent
    1. The Qianhai Zone will issue relevant policies to attract foreign professionals to work and live in Qianhai. 
    2. Qualified Hong Kong professionals will be permitted to provide services to enterprises or individuals in the Qianhai Zone. 
    3. Hong Kong professionals who are qualified as Mainland certified public accountants will be allowed to serve as partners in domestic accounting firms.(
  4. Educational and Medical Services
    1. Wholly foreign-owned international schools will be permitted to be established by Hong Kong service providers. Such schools will provide education to children of foreigners or Chinese people with permanent foreign residence working in the Qianhai Zone.
    2. Wholly foreign-owned hospitals will be permitted to be established by Hong Kong service providers.
  5. Telecommunications
    1. Hong Kong telecommunication carriers will be allowed to establish joint ventures with domestic carriers under CEPA to operate telecommunication businesses. 
    2. Local telecommunication enterprises will be encouraged to make preferential telecommunication rates applicable to the Qianhai Zone.
    3. International telecommunication channels will be constructed to satisfy the needs of the Qianhai Zone.

Compared with previous government pronouncements related to the Qianhai Zone, the Reply provides more detailed policies and specific guidance regarding the development of the Qianhai Zone. Yet most provisions are still too broad to allow for actual implementation. For example, the Reply provides that there shall be a broadening of the channels for repatriation of overseas RMB funds. However, the Reply fails to set out detailed guidance as to what channels may be available. Detailed implementation rules are expected to be promulgated by the relevant government agencies in connection with the general policies set forth in the Reply.

Given that the overseas use of RMB and the repatriation of RMB are very hot topics, it is expected that the development of the Qianhai Zone may lead to some ground-breaking rules in this regard. It is also foreseeable that domestic financial institutions, including banks, private equity funds, and other institutions, may set up branches or subsidiaries in the Qianhai Zone to enjoy the preferential policies in connection with the use of RMB.