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Overview

The Shanghai Free Trade Zone ("FTZ") was launched on September 29, 2013, which is considered China's most significant attempt at financial reform since establishing the Shenzhen Economic Special Zone on the border with Hong Kong in 1980. The FTZ covers 29 square kilometers (approximately 11.2 square miles) at Pudong District in Shanghai and includes four customs supervision areas, i.e., the Waigaoqiao duty-free zone, the Waigaoqiao duty-free logistics park, the Yanshan duty-free port and the Pudong international airport duty-free area.

Based on the current rules and regulations issued by the State Council and the Shanghai Municipal People's Government, the following are key issues and new changes applicable to the FTZ.

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New "Negative List" for Foreign Investment in FTZ

The Shanghai Government released the "Special Administrative Measures on the Entry of Foreign Investment into China (Shanghai) Free Trade Zone (2013 Negative List)" (the "Negative List") on September 30, 2013. The Negative List covers 18 sectors of the national economy, including but not limited to manufacturing, transportation, information technology, finance, real estate, business service, and entertainment. The Negative List came into effect immediately, with updates planned based on future conditions and developments.

The "Negative List" means that if a sector is on the list, foreign investment will be subject to restrictions or prohibitions. However, for sectors not on the list, foreign enterprises will be given national treatment. This means that foreign investors can invest in sectors not on the "Negative List" without any restriction or joint venture requirements. Foreign enterprises only need to register their projects, without the need to apply for approval.

Note that if any national security or anti-monopoly investigations are involved, currently relevant regulations will still apply to the FTZ. Projects that endanger national security or public safety, along with activities that harm the public interest will be prohibited in the FTZ. Investors from Hong Kong, Macao and Taiwan will also have to comply with the Negative List.

From Approval System to Registeration System

Except for those domestic investment projects the State Council reserves for approval, for industries not mentioned in the Negative List, a new registration system will replace the current approval system for foreign investment projects. Additionally, all foreign investment contracts and Articles of Association signed by foreign-funded enterprises will also be covered under the new registration system.

Investors should follow the procedures and timelines to set up a corporation in the FTZ. After receiving pre-approval for the corporation's name, foreign investors shall log into the FTZ online platform to fill in the application forms and provide acknowledgement of the related registration notice. The Registration authority shall then process the investors' registration application within one business day after the investors complete the online application, and send the proof of registration to both the investors and other related agencies.

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Implementation of New Tax Policies Promoting Investment and Trade

For all enterprises registered in the FTZ or their individual shareholders, if they invest in non-monetary assets, whose value increases later, they can average their asset appreciation premium for individual income tax and corporate income tax within five years. In addition, highly skilled employees or employees in short supply will be permitted to pay their income taxes arising from ownership of their employer companies' shares or equity in installments.

An export tax refund program will be available for financial leasing companies and their project subsidiaries that register in the FTZ. For domestic financial leasing companies or their project subsidiaries that register in the FTZ, they will enjoy import value-added tax ("VAT") benefits on aircrafts with a net weight of no less than 15 tons, as long as domestic airlines will lease such aircrafts with approval from relevant government agencies. Enterprises registered in the FTZ will still be charged with import VAT and consumption tax if they manufacture and process their merchandise in the FTZ but sell such merchandise to the rest of Mainland China, which is outside of the FTZ. Manufacturing enterprises or manufacturing service enterprises that are registered within the FTZ are exempted from any tax for imported machinery or equipment for their operations.

Open Up Six Investment Areas (Eighteen Service Sectors)

Based on the "Measures to open up the service sectors in the China (Shanghai) Pilot Free Trade Zone" ("Measures"), the following 18 service sectors, divided into 6 investment areas, will be opened up in the FTZ to foreign businesses.

I. Financial services (3 opening sectors) At least three major pilot programs regarding financial services will be established in the FTZ: convertibility of Renminbi (the official currency of China, hereafter referred as to "RMB") capital accounts, interest rates liberalization, and cross-border use of RMB. In the FTZ, the price for a financial institution's assets will be determined at the market rate. Enterprises are encouraged to leverage both inbound and outbound resources and markets to liberalize cross border financing. Policies regarding foreign debt administration will be further reformed in the FTZ as well. Multinational corporations will be encouraged to set up regional or global treasury centers to centralize their foreign currency exchange operations.

  1. Banking service Qualified foreign financial institutions will be allowed to set up wholly foreign-owned banks in the FTZ. Qualified private capital institutions will also be permitted to set up Sino-foreign joint venture banks in the FTZ. For Chinese banks, they will be allowed to conduct offshore business in the FTZ if they are considered "qualified" as well. As of the end of November 2013, nine Chinese banks and eight foreign banks have registered in the FTZ. These Chinese banks include Bank of China, Industry and Commerce Bank of China, China Construction Bank, China Agriculture Bank, Bank of Communication, China Merchant Bank, Pudong Development Bank and Shanghai Bank. Registered foreign banks include Citi Bank, Development Bank of Singapore (DBS), HSBC, Deutsche Bank and Hang Seng Bank. Health and medical insurance Foreign-invested health and medical insurance institutions will be allowed to establish businesses in the FTZ. Financial Leasing There will be no minimum registered capital requirements for subsidiaries of single ship or aircraft corporations established by financial leasing companies in the FTZ. Additionally, financial leasing companies will be permitted to operate commercial factories, which are related to their primary businesses in the FTZ.

II. Transportation services (2 opening sectors)

The FTZ will leverage the Waigaoqiao port, the Yangshan deep-water port and the Pudong international airport, implementing a new international shipping operation model and developing shipping finance, international ship transportation, international ship management and international brokerage.

  1. Ocean cargo transportation For international shipping enterprises, restrictions on the portion a foreign equity contributes will be less strict in Sino-foreign equity joint ventures and cooperative joint ventures. Chinese-invested corporations that own or control foreign vessels will be allowed to transport containers for export and import use between domestic coastal ports and Shanghai ports. International ship management Wholly foreign-owned ship management enterprises will be allowed to incorporate in the FTZ.

III. Commerce and trade service (2 opening sectors)

  1. Value-added telecommunications Qualified foreign entities will be allowed to run specific types of value-added telecommunication services. Approval by the State Council will be required if the value-added telecommunication services will depart from current administrative regulations. Entertainment gaming consoles sales and services Foreign enterprises will be able to manufacture and sell entertainment and gaming consoles, with approval from the culture administrative authorities after content censorship.

IV. Professional services (7 opening sectors)

  1. Legal services Mainland Chinese law firms are expected to enhance cooperation with "foreign law firms." For the purpose of this provision, law firms in Hong Kong, Macau and Taiwan are also considered foreign law firms. Credit investigation service Foreign-invested credit investigation companies will be allowed to establish businesses in the FTZ. Travel agencies Sino-foreign equity joint venture travel agencies registered in the FTZ will be allowed to provide travel services to overseas locations except to Taiwan. Human resources As long as the foreign equity interests do not exceed 70% of the whole investment, Sino-foreign equity joint ventures can set up human resources agencies. Investors from Hong Kong and Macau will be allowed to establish wholly foreign-owned human resources agencies. The minimum registered capital for foreign-invested human resources agencies will be lowered from $300,000 USD to $125,000 USD. Investment management Foreign-invested joint-stock holding companies will be allowed to incorporate in the FTZ. Engineering design For foreign-invested engineering design companies registered in the FTZ (excluding engineering survey companies), the criteria on past engineering design experience will be waived when they apply for the qualification to provide service in Shanghai for the first time. Construction services Wholly foreign-owned construction enterprises registered in the FTZ will be allowed to conduct Sino-foreign joint construction projects in Shanghai without any equity restrictions.

V. Cultural service (2 opening services)

  1. Performance agencies Equity restrictions for foreign-invested performance agencies will be removed and wholly foreign-owned performance agencies will be allowed to provide services in Shanghai. Entertainment facilities Wholly foreign-owned entertainment facilities will be allowed to establish and provide services in the FTZ.

VI. Public services (2 opening sectors)

  1. Education and vocational skills training For-profit Sino-foreign cooperative joint venture education and vocational training institutions will be allowed to establish businesses in the FTZ. Medical service Wholly foreign-owned medical institutions will be permitted to set up businesses in the FTZ.

Conclusion

In 2009, Shanghai set a goal to become an international navigation and financial center by 2020. During the past four years, both the Chinese central government and the Shanghai government have put great efforts in infrastructure improvement, moving towards such a goal. The step-by-step reform in the FTZ will be a pilot project for the reform of other provinces of China and the entire country in the future.

Additional Resources

Region: China
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