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Original title: Hainan Free Trade Port issued substantive operating rules for companies to avoid becoming a tax haven
Our reporter Du Lijuan reports from Beijing
After tax havens such as the Cayman Islands and the British Virgin Islands have enacted economic substance laws, the requirements of tax havens on the operation of corporate entities have also increased. Drawing lessons from the experience of managing global tax havens, the Hainan Free Trade Port has also put forth substantial operational requirements for the companies that have been established.
A China Business News reporter learned from the tax department that Hainan Province has recently clarified the “substantial operation” requirements in the preferential income tax policy of free trade port enterprises. Among them, the substantive operation of companies follows the principle of substance over form with emphasis on production, operation, attention to personnel, finances, assets, etc.
On the market side, after the Hainan Free Trade Port introduced several preferential tax policies, low tax rates have become a major factor in attracting businesses to establish themselves. However, in a context of low tax rates, a large number of “shell companies” are likely to appear. To prevent Hainan from becoming a tax haven for companies, incorporating substantive operational requirements can allow domestic and foreign companies to truly invest their assets and talents in the Hainan Free Trade Port.
Entity authentication
As a support policy granted to Hainan by the central government, the Hainan Free Trade Port implements a preferential personal income tax policy of 15% for high-level talent in short supply, and a 15% reduction in tax. on corporate income for businesses in encouraged industries. Compared to the preferential policies of global free trade ports, the preferential tax rate currently implemented by the Hainan Free Trade Port is very attractive for businesses to enter.
In June 2020, the State Council issued the master plan for the construction of the Hainan Free Trade Port and related follow-up regulations. According to the relevant regulations, from 2020 to 2024, encouraged industries registered in the Hainan Free Trade Port and operating substantially will be reduced by 15% tax rate applies to corporate income tax.
Recently, the Provincial Tax Office of the Hainan State Tax Administration, the Hainan Province Finance Department and the Hainan Provincial Market Supervision Administration jointly issued Announcement No. 1 of 2021 to provide detailed answers on how identify substantive operations for companies in the Hainan Free Trade Port industries encouraged.
The announcement stated that for resident companies registered in the free trade port that have not established branches outside the free trade port, they must have the four elements of production and operation, personnel, accounting and assets in the free trade port. Substantial operation of the Commercial Port.
A tax official explained that this means that for resident companies registered in the free trade port that have not established branches outside the free trade port, as long as any of the four elements above is not in the free trade port, no is a noun. .Operations. “Simply put, a resident company registered in the free trade port must have the above four items at the same time for it to be considered to be substantially operating, and then it can enjoy the 15% reduction in income tax from companies. If the elements are incomplete, they are not substantive. Companies that operate sexually cannot enjoy the corresponding tax preferences in accordance with the regulations. “
This provision has largely prevented companies from establishing “joint stock companies” in the Hainan Free Trade Port, thus reducing the corresponding tax burden on companies through the use of shell companies.
Previously, hit by policy dividends, Khorgos became a corporate “tax haven.” According to local statistics, there were only 113 companies registered in Horgos in 2010, and it increased to more than 20,000 in 2018. The appearance of “shell” companies is the main reason for the increase in registered companies.
“Based on these considerations, the Hainan Free Trade Port, half a year after the introduction of the relevant policies, explained the specific requirements for the substantive operation and strengthened the conditions for the four elements at the same time. The purpose is really attract companies to invest, rather than simply through concessions of low tax rates attract companies to register, which is different from the connotation of a tax haven, “a local finance and tax official from Hainan.
Function for “shell”
“In fact, the requirements for the economic substance of companies have also become an important part of the tax havens business in recent years. Under this wave, more and more shell companies are also faced with the fate of being cleaned up.” . An international taxpayer People say so.
According to the person, the economic substance certification requirements of companies started in 2018. At that time, the world’s best-known tax havens have completed national legislation on substantive activity requirements in response to OECD requirements ( Organization for Economic Cooperation and Development). The basic requirements of these regulations are that the relevant entities engaged in related activities must meet the requirements for basic revenue-creating activities, the company has sufficient and qualified employees, sufficient expenses, and physical office space.
After the implementation of the Economic Substances Law, companies registered in tax havens that do not comply with the relevant requirements may face sanctions such as fines from tax authorities or withdrawal from government agencies.
“On the basis of these policy requirements, the substantive operating activities of the Hainan Free Trade Port are primarily aimed at encouraged industrial enterprises, and the enterprises must comply with the policy requirements in terms of operational activities and personnel. This is the same as the economic substance law promulgated by the tax haven. The purpose is to require that companies registered in this area have real staff, fixed office space and real business activities, not just the function of a shell company. tax subject introduced .
The person also introduced that after the release of this requirement, for those companies that rent an office space in Hainan and hire some employees and want to enjoy low tax rates, they will not be able to enjoy relevant benefits in the future because they do so. do not meet the requirements for substantive operations Preferential policies are fundamentally different from the role of a shell company.
Considering that the announcement has only been made public, and is primarily to clarify the “substantial operation” of the preferential policy, other issues in actual implementation may arise in the future.
The Deloitte report noted that among the four elements above, the announcement noted that the personnel requirement is to meet the production and operating needs of employees working at the free port, but did not specify the specific number of days. requirement, if there are staff in the group If several companies work at the same time and complete the business process of the free port company through online communication operations, will it affect the determination of “employees working in the free port”?
Regarding these issues, tax officials consider that the current policy is to clarify substantive operations, given that the policy continues to be implemented in the future, it is not ruled out that more detailed policies will continue to be introduced.
(Editor: Meng Qingwei review: Yan Jingning)
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