On May 11, 2015, the State Council released Circular on Matters Relating to Preferential Policies for Tax and Other Aspects (Circular Guofa  No. 25, “Circular 25”), providing new guidance on the clean-up of local preferential policies.
Background of the Clean-up Campaign
At the end of 2014, the State Council and the Ministry of Finance respectively released Circular of the State Council on Cleaning up and Standardizing Preferential Policies on Tax and Other Aspects (Circular Guofa  No. 62, “Circular 62”) and Circular on Effectively Implementing the Decision and Arrangement of the State Council on Cleaning up and Standardizing Preferential Policies on Tax and Other Aspects (Circular Caiyu No. 415, “Circular 415”), urging various local governments to clean-up and standardize local tax and fiscal incentive policies (the “Local Incentives”).
Since the release of Circular 62 and Circular 415, some local governments immediately launched campaigns to abolish all those improper Local Incentives, which caused wide concern and worry among the investors.
New Guidance Under Circular 25
Circular 25 provides clarifications associated with the clean-up of Local Incentives
a) State Preferential Policies
The preferential policies for tax and other aspects that are formulated by the State in a unified manner shall be implemented on an item-by-item basis.
b) Preferential Policies Issued by Various Local Governments As to Local Incentives formally documented, Circular 25 provides a grace period to facilitate a smooth transition:
- if there is a specified time limit, such time limit applies;
- if there is no specified time limit but adjustment is genuinely needed, the local governments and relevant departments concerned shall set a transitional period according to the principle of ensuring policy stability by properly managing the pace of change, and continue to implement the said policy during the transition period.
c) New Preferential Policies As to new Local Incentives to be formulated by local governments, Circular 25 provides various guidance:
- any matters that are related to taxes or to non-tax revenues that are approved by the Central Government shall be reported to the State Council for implementation upon approval;
- others shall be implemented upon approval by the local governments and relevant departments, in which expenditure planning shall not be linked with the taxes paid by enterprises or non-tax revenues.
Under Circular 25, the regular refund-upon-collection approach adopted by various local governments would be considered non-compliance and thus may not be appropriate going forward.
d) Local Incentives Committed by Contracts Circular 25 provides a grandfathering treatment to Local Incentives that have been committed by investment contracts: Local Incentives contained in the contracts signed by different regions with enterprises shall remain effective, and the aspects already performed thereunder shall not be retroactive.
Han Kun Notes
Circular 25 provides an enterprise-friendly transition approach in the cleaning up of Local Incentives. It is no doubt that the release of Circular 25 is quite positive to standardize Local Incentives and structure a fair investment platform. We suggest the investors should proactively initiate communications with their respective local authorities with regard to the implementation of Local Incentives.