China Publishes Development Plan for Guangdong-Macao Cooperation Zone

On 5 September 2021, the Development Plan for the Guangdong-Macao In-Depth Cooperation Zone in Hengqin (“Hengqin Plan”) was jointly published by the Communist Party of the China Central Committee and the State Council. Laws and regulations are subsequently to be established based on the Hengqin Plan, which targets the year 2035 for the achievement of its objectives. The cooperation zone to be established (“Zone”) is comprised of the 106-square-kilometer island of Hengqin, which is near the 30-square-kilometer Macao Special Administration Region (“Macao”). A primary purpose of the Hengqin Plan is to promote the sustainable development of Macao’s economy, including by contributing to Macao’s economic diversification and providing a new home for some of Macao’s 600,000 residents to live and work in, apparently with the ultimate aim of (greater) Macao serving as another international business center. This Newsletter summarizes key points of the Hengqin Plan and its implications as well as comparing it to the recently established Hainan Free Trade Port (“Hainan FTP”).

Special Import-Export Arrangements

The Hengqin Plan states that the Zone will be subject to special import-export arrangements “between two lines”. The “first line” will be between the Zone and Macao, and the “second line” between the Zone and Mainland China. The Hengqin Plan puts forth an arrangement that will allow goods to enter the Zone freely across the first line, i.e., from Macao. Customs duties, tax and inspections will be handled only if and when goods cross the second line. However, even when crossing the second line, customs duties will be exempted on (i) goods that contain no imported materials and (ii) goods in which production processes carried out in the Zone add at least 30% value.

From the other side, certain goods entering the Zone from Mainland China will be treated as having been exported outside China. Therefore, on the one hand, companies who are not on a “negative list” (for various misconduct) may obtain rebates of any value-added and consumption taxes they paid in Mainland China for the input into such goods, but on the other hand, all companies will have to pay export customs duties on such goods. The list of covered goods and the negative list are expected to be released in the near future.

Preferential Treatment for Enterprises and Individuals

According to the Hengqin Plan, the Zone will focus on developing certain industries, including traditional Chinese medicine, high-end manufacturing, modern finance, technology R&D and tourism, to a certain extent broken down into subsectors, e.g., (in high-end manufacturing and technology R&D) integrated circuits, electronic components, new energy, big data, artificial intelligence and biomedical products.

The Hengqin Plan states that a reduced 15% corporate income tax (CIT) rate will apply to businesses in the industries referred to above as well as to another set of business, ones that promote so-called “diversified development”, but the latter set has not been elaborated at all. In addition, no CIT will be imposed on income from overseas investments by either set of businesses. The Hengqin Plan thus encourages such enterprises to “go global”.

According to the Hengqin Plan, the Zone will explore innovative cross-border monetary control, including inflow and outflow of cross-border capital, and improve capital account convertibility to boost modern financial industries. The authorities in Hengqin will simplify business establishment procedures for at least some businesses.

The Hengqin Plan indicates that foreign and high-end domestic talent and urgently-needed professionals working in the Zone will not pay more than 15% individual income tax, but the standards for who qualifies as “high-end” talent are yet to be released. Similarly, Macao residents working in the Zone will not be subject to wage-related individual income tax above their respective tax rates in Macao (where the current maximum is 12%).

Comparison of the Zone with the Hainan Free Trade Port

On 1 June 2020, China released a plan to establish a free trade port on the island of Hainan and since then has been gradually implementing the plan (most notably by promulgating the Hainan Free Trade Port Law on 30 June 2021). The Hainan FTP was said to aim at transforming the island of Hainan into a world-leading free trade hub, similar to Hong Kong and Singapore. While many details about most rules in the Hengqin Zone remain to be clarified, and they may end up largely similar to those of the Hainan FTP, key differences apparent so far include:

• While the Hainan FTP’s reduced 15% CIT tax rate is provided to apply only until the end of 2024, there is as yet no expiration to the 15% CIT tax rate provided for in the Hengqin Plan.
• The Hainan FTP has essentially the same “between two lines” special import-export arrangements as the Hengqin Plan provides for, but the first line in the Hainan FTP is between it and all other places outside China (in contrast to Hengqin’s first line being between it and Macao) and the value-added and consumption tax rebates in Hainan FTP are not subject to any “negative list.”
• Under the Hengqin Plan, individual mobility apparently will only be increased for people moving between the Zone and Macao, whereas the Hainan FTP provides for visa-free entry to foreigners from 59 countries.

Takeaways

Following on the heels of the Hainan Free Trade Port’s establishment, China continues to introduce special initiatives for economic development, combining both domestic and foreign elements. The Hengqin Plan, while centered on a neighbor island of Macao, likely aims to boost the latter’s long-term development, by providing it with physical and business “breathing room” to grow into a more diversified business powerhouse. Overall, the implementation of the Hengqin Plan should liberalize and streamline the flow of people, goods and capital into and out of the Zone, particularly to and from Macao. Businesspeople will thus have more options for newly advantageous areas of investment and further improved cross-region commerce.