Preferential Individual Income Tax (IIT) Treatment for High-End Talents in Hainan Free Trade Port To support the development of the Hainan Free Trade Port (“HFTP”), China’s Ministry of Finance and State Taxation Administration released the Circular on the Individual Income Tax Policy for High-end and Urgently-needed Talents in the Hainan Free Trade Port (“Circular 32”) on 23 June 2020, which would be effective retroactively from 1 January 2020 and will expire on 31 December 2024. What are the preferential IIT policies? If the effective IIT rate on the recognized comprehensive income, business income, and subsidies derived by the qualified talents working in the HFTP is higher than 15%, the exceeding portion that has been prepaid will be refunded to the talents through annual filing. Who is qualified for the preferential IIT policy? Based on the Interim Measures for the Management of the List of High-end and Urgently-needed Talents Entitled to the Preferential IIT Policy in Hainan Free Trade Port (“Circular 41”) issued by the People’s Government of Hainan Province on 26 August 2020, which has been effective retroactively from 1 January 2020 to 31 December 2024, the above preferential IIT policy is available for a taxpayer that meets the following conditions: 1. The Chinese taxpayer should have paid the social insurance for six consecutive months in a tax year (including the month of December of the year), and has concluded a labor contract with a term of more than one year with an enterprise incorporated and substantially operated in the HFTP. 2. The foreign taxpayer who is not required to pay the social insurance in China, but has concluded a labor contract with a term of more than one year with an enterprise incorporated and substantially operated in the HFTP. In addition, the taxpayer is required to meet the following requirements before being recognized as a high-end or urgently-needed talent:- • High-end talents: The taxpayer should be identified as high-end talents by the talents management department at all levels in Hainan Province, or earn income of more than RMB 300,000 in one tax year in the HFTP. The threshold may be adjusted based on the economic and social development conditions of Hainan Province. • Urgently-needed talents: The business engaged by the taxpayer should be on the List of the Urgently-needed Talents of the HFTP (2020 Version) issued as the attachment of Circular 41. Our observation • The preferential tax rate will not be applicable to the taxable capital gain income derived from sales of assets, i.e. shares, real estate and etc. • The companies in the HFTP with which the taxpayer concluded the effective labor contract are also required to have substantial operation in the HFTP in order for the eligible employees to enjoy the above preferential IIT treatment. • According to the Master Plan for the Construction of the HFTP, after the implementation of Phase 1 from 1 January 2020 to 31 December 2024 and before 2035, all taxpayers who stay in the HFTP for more than 183 days a year would be subject to IIT at the rates of 3%, 10% and 15%. Such preferential tax rate would not be applicable to the qualified talents only. 8 DLA PIPER HONG KONG Implementation Rules on Preferential Enterprise Income Tax (“EIT”) Treatment to Support the Development of the Hainan Free Trade Port To support the development of the Hainan Free Trade Port (“HFTP”), China’s Ministry of Finance and State Taxation Administration released the Circular on Preferential Enterprise Income Tax Policies for the Hainan Free Trade Port (“Circular 31”) on 1 June 2020 and Announcement of the Hainan Provincial Tax Service under the State Taxation Administration on Issues concerning Preferential Enterprise Income Tax Policies for Hainan Free Trade Port (“Announcement 4”) on 31 July 2020, both wouldbe effective retroactively as from 1 January 2020 and will expire on 31 December 2024. What’s new? 1. Reductions of EIT rate to 15% A reduced 15% EIT rate (as opposed to the standard rate of 25%) is available for a taxpayer incorporated in the HFTP so long as the following conditions are met: • The primary business activity is within the scope of the encouraged businesses as set forth in the specific industry catalogues1 ; • The revenue from such primary business activity accounts for 60% or more of the gross revenue of the taxpayer; and • The taxpayer carries out substantial business operation in the HFTP. Please note that the reduced EIT rate will not apply to taxable income attributable to the head office or branches that are not established in the HFTP. For example, if a company's head office is established in the HFTP and satisfies the above conditions, the reduced rate shall apply to the taxable income attributable to the branches established outside the HFTP; if a company's head office is established outside of the HFTP, the reduced rate shall only apply to the taxable income attributable to the company's branches established in the HFTP with the satisfaction of the above conditions. It should also be noted that when determining whether the conditions related to engaging within the scope of encouraged business activities and the 60% revenue test are satisfied, the company’s head office or its branches established outside the HFTP would not be considered. 2. Tax exemption for income arising from foreign direct investment Tax exemption will be available to income derived by taxpayers from foreign jurisdictions, namely, (i) operating profits derived by foreign branches that are established by a taxpayer in the HFTP from 1 January 2020 through 31 December 2024; and (ii) dividend income derived by a foreign subsidiary directly invested by the taxpayer in the HFTP from 1 January 2020 through 31 December 2024, provided that the following conditions are satisfied: • the taxpayers established in the HFTP are engaged in tourism, modern services, and high- and new-technologies sectors; • the taxpayer shall hold a 20% or more equity interests in the foreign subsidiary; and • the statutory EIT rate in the jurisdiction where the foreign subsidiary or branch is incorporated should not be less than 5%. 1 Based on Circular 31, the encouraged businesses refer to those which are provided in the Guiding Catalogue for Industrial Structure Adjustments published by the National Development and Reform Commission (NDRC) on 30 October 2019, the Catalogue of Encouraged Industries for Foreign Investments issued by the NDRC on 30 June 2019, and the Catalogue of Newly added Encouraged Industries in the Hainan Free Trade Port which is to be released. 9 DLAPIPER.COM 9 3. Accelerated capital expenditures deduction For fixed assets (excluding real properties and other buildings) or intangible assets that are purchased or developed by taxpayers established in the HFTP from 1 January 2020 through 31 December 2024 may accelerate the income tax deduction as follows: For assets valued at RMB5 million or less, an immediate tax deduction will be allowed; and • For assets valued at more than RMB5 million, an accelerated depreciation or amortization schedule will be allowed. No pre-approval or post-recordal filing is required for entitlement of the above preferential tax treatments. 10 DLA PIPER HONG KONG Interim Provisions on the Examination of Concentration of Undertakings The Interim Provisions on the Examination of Concentration of Undertakings (“Provisions”) was promulgated by the State Administration for Market Regulation (“SAMR”) on 23 October 2020 and came into effect on 1 December 2020. The Provisions integrated several prior regulations in relation to the reporting and review of concentration of undertakings, assessment on the impact of concentration of undertakings on competition, additional restrictive conditions for the concentration of undertakings, application of simple cases, investigation on failure of declaration, etc. and would become the major merger review rule, together with the PRC Anti-Monopoly Law and the Provisions of the State Council on the Thresholds for Reporting Concentrations of Undertakings in China. The following are some highlights of the Provisions: • The Provisions clarifies the relevant substantive criteria in the review of concentration of undertakings, including factors to be considered to determine “control”, methods to calculate turnover, circumstances to apply simple cases, factors to be considered to assess the impact of concentration of undertakings on competition, factors to be considered for the additional restrictive conditions, etc. • The Provisions clarifies the scope of reporting obligors. In the case of merger, all parties shall be the reporting obligor. In other circumstances, the party who obtains control or exercises decisive influence over other undertakings shall be the reporting obligor. If there is more than one reporting obligor in the same concentration, one of them may be entrusted to carry out the relevant reporting. If the entrusted reporting obligor fails to carry out the declaration, other reporting obligors would not be exempted from the reporting obligation. • For concentration which does not meet the thresholds for reporting, if the facts and evidence collected pursuant to the statutory procedures show the concentration has or may have the effect of eliminating or restricting competition, the SAMR should also conduct an investigation. • The SAMR may supervise the obligor’s implementing restrictive conditions through a trustee entrusted by the obligor and approved by the SAMR. Such trustees include trustees of a supervisory role who supervise the implementation of restrictive conditions and divestiture trustees who are responsible for selling divested business. • The Provisions clarifies the term of the relevant additional restrictive conditions and provides four circumstances where the additional restrictive conditions shall be removed. • The Provisions clarifies that the illegal concentration of undertakings includes failure to declare, implementing concentration without approval and violating the relevant decisions of the SAMR. • The Provisions strengthens the relevant legal liabilities. It imposes liabilities on the reporters who conceal relevant information or provide false materials. It also imposes liabilities on the trustees and the buyers of divested business who fail to perform their obligations. • The SAMR may delegate its provincial level counterpart to examine cases about the concentration of undertakings. The Provisions increases the transparency and predictability of law enforcement. It also enhances the maneuverability of merger review rules. We expect the Provisions will facilitate the reporting of business operators and improve the examination efficiency of the authority, and thus reducing the overall transaction cost of the business operators.