LOCAL INCENTIVES REVOKED
Mar. to Jun. 2015 China Bulletin

The State Council and Ministry of Finance took a decisive stroke by issuing the Notice Regarding Cleaning Up and Standardizing Preferential Policies in November 2014 (Notice 62), possibly ending a decades long tug-of-war over preferential incentives local governments use to attract investment.  Existing incentives were to be reported to the State Council and cleaned-up on a consolidated basis by March, 2015, provoking an outcry from companies such as Foxconn (Apple’s supplier) that would lose an estimated RMB 5 billion (USD 800 million) in subsidies in Zhengzhou.  In May, the State Council responded to protect existing local subsidies during a transition period.

Common subsidies targeted by Notice 62 include waiver of or deferral collecting administrative charges, government-mandated funds and social security payments, transfer of land or other state-owned assets at reduced or no cost, subsidy or refund of taxes or land transfer payments after collection, payment on behalf of the taxpayer, reduced fees for water and electricity, lump sum subsidies, etc.  Incentives in violation of national laws and regulations were to be ended by December 1, 2014 and all local incentives were to be cleaned up by the end of March, 2015.

In response to the outcry and hardship from the implementation of Notice 62 faced by both investors and local governments from the implementation of Notice 62, the State Council issued Notice 25 in May, 2015.  Notice 25 provides that local incentives with an expiry date may be continued to that date and a reasonable transition period should be determined for other incentives.  Contracted incentives may continue and incentives already received will not be clawed back.

Despite the respite, current incentives will eventually end and no new incentives may be implemented unless allowed by national laws or regulations or reported to the State Council for approval.  Local incentives not related to tax revenue or non-tax funds may be implemented after approval by relevant local authorities.

Although local government have found ways around national restrictions on incentives in the past, the national government appears quite serious and the favorable preferential local policies that attracted foreign investors to locate in certain areas of China in the past may be at an end.  The result, however, should be a more level playing field where cities and districts are judged on their suitability for the business rather than on the local authorities’ ability to make end-runs around national regulations.

Questions?  Please contact Allan Marson at china.desk@ishimarulaw.com or +1 408-738-0592 #719 for a complimentary consultation a member of our team on incentives and alternative for locating in China.