Key Points

  • Circular No. 75 covers the tax and customs implications for the China (Shanghai) Pilot Free Trade Zone.
  • Tax rules covered include discount on airplane purchases, VAT and Customs duty for domestic sales in the PFTZ, machinery and equipment, and bonded display trading platform.
  • Other tax related details are still to be implemented by legislation, such as tax refunds for financial leasing companies, five-year income tax installment payments on asset appreciation, and installment payments of individual income tax payable under the stock incentives program.
  • Customs supervision in PFTZ may face with significant changes compared to the rules in bonded areas, bonded logistic park or export processing zone.


Cai Guan Shui [2013] No.75 (“Circular No. 75”) has set forth a summary of the relevant tax and customs duty rules applicable on import transactions in the China (Shanghai) Pilot Free Trade Zone (“PFTZ”). Generally, most of the rules in Circular No. 75 are formulated under the principle rules applicable in existing bonded areas, bonded logistic park or export processing zone, though with small modifications.

Details of the Tax and Customs Duty Rules

Tax Rules under Circular No. 75

There are four major import tax rules under Circular No. 75:

1. Purchase of airplane

For the leasing company registered in the PFTZ or a project subsidiary set up by such company, a 5% reduced import VAT is applicable on its overseas purchases of airplanes with deadweight of more than 25 tons.

Similar rules are found under Shu Shui Fa [2013] No. 90, where the leasing company in regions under Customs special supervision are eligible for similar reduced import VAT for airplane purchase.

2. Taxation of domestic sale from PFTZ

Domestic sales by companies in PFTZ will still trigger import VAT and Customs duty. The principle rule is that the goods will be treated as imported if it is sold to the domestic market. According to Circular No. 75, a pilot scheme will be implemented, under which the import duty may be levied based on the corresponding imported materials or taxed based on its original actual Customs declaration status, but not taxed as the finished goods. This is not the first time that China has drafted such a pilot scheme and we have already seen similar pilot rules in Pingtan Comprehensive Experimental Area.

Existing rules in bonded areas or exporting processing zones are slightly different and the taxation method for domestic sales may vary due to the business type of the processing company. However, since there are no specific detailed rules yet, it is still not certain how this rule is comparable to the existing rule in bonded areas or exporting processing zones. We would like to see details regarding how the dutiable value of the products are determined if they are sold from the PFTZ to the domestic market.

3. Import of machinery, equipment and goods by manufacturing company and manufacturing service business

Circular No.75 specifies that the machinery, equipment and other goods required for import by manufacturing enterprises and producer service business may be entitled to tax exemption. An exception still exists for import of certain goods if any laws, administrative regulations or rules explicitly prohibit tax exemption treatment for such goods.

China has established several tax free import policies in many aspects, such as the equipment or materials imported in the export processing industry, which may be qualified for the duty free import or certain duty refund if the products manufactured or processed will later be exported; the foreign invested companies can claim duty free import for equipment used in the encouraged projects. According to the wording under Circular No.75, it does not build up a new duty free import regime and the policy in PFTZ should still be within the existing duty free import regulatory framework.

Generally, we would expect to see detailed implementation rules on any possible new administrative measure in this regard, such as whether there are any significant changes in the approval procedures (as this sometimes would impact on the possibility to benefit from such exemption), whether the existing Customs supervision measures are still applicable or to what extent the current Customs supervision measures are applicable for equipment or material imported and used in the PFTZ.

4. Bonded display trading platform

While the taxation or Customs rules mainly cover the manufacturing and industrial sectors, the rules relating to the bonded display trading platform may have an impact to the consumer retail business.

Circular No.75 provides that a bonded display trading platform is allowed to establish in a particular area within the PFTZ. It is expected that consumer products can then be traded/sold in the bonded display trading platform.

Similar market and trade platforms can also be found in bonded areas in other cities, e.g., Chongqing and Tianjin. However, as the detailed implementation rule remains to be seen, it is still unclear how such a platform will be operated. According to the rules in Chongqing and Tianjin, the products displayed in the trade platform are bonded goods and domestic consumers, when buying those goods, will need to complete Customs declaration and pay relevant import taxes.

Circular No.75 also states that the existing taxation policies in the bonded zones or bonded logistic park of Shanghai Waigaoqiao, Yangshan and Pudong Airport will still apply to the PFTZ.

We further note that there are other tax related rules which are mentioned in the Framework Plan are still not promulgated with details, such as tax refunds for the financial leasing company in the PFTZ; the five-year installment payment of income tax payable on the asset appreciation recognized in the investment in kind; or the installment payment of individual income tax payable under the stock incentives program.

Customs Supervision Measure on Import and Export

The Customs supervision in PFTZ may face with significant changes compared to the rules in bonded areas, bonded logistic park or export processing zone.

According to the Framework Plan, the highlight catching our attention is that goods are allowed to be declared to the Customs after arriving in the zone, and the Customs filing procedures of the goods imported into the PFTZ is supposed to be greatly simplified. Such an import supervision model is regarded as the “Frontier Opening” (i.e., goods flowing between overseas and the free trade zone). The “Second Tier” (i.e., goods flowing between the zone and other domestic areas) supervision will be coordinated by improvements to the e-information network, entry and exit record lists cross-check, accounting books management, physical verification and risk analysis. Customs intends to adopt more advanced technological measures in its administration and the flow of goods in second tier would still be subject to severe surveillance.

We hope to see this new Customs administration characterized as the “Frontier Opening” to be a fundamental change from the old bonded zones in China, and hope that the PFTZ would become more similar to the free trade zone in the international sense.

Measure on Quality Supervision, Inspection and Quarantine

Guo Zhi Jian Tong [2013] No. 503 sets forth a major policy regarding the Quality Supervision, Inspection and Quarantine measures applicable in the PFTZ. On a general level, this notice focuses on less administrative power to be imposed on the flow of goods in the area. However, we are disappointed to see that no specific implementation rules are included in this regard, with the whole document only giving a vague direction of possible future developments. As is normal practice in legislation and rule-making procedures in China, we are unable to give any detailed estimates before further detailed implementation rules are formulated.