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Understanding investment trends in China’s bonded zones

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By Dezan Shira & Associates

The General Administration of Customs (GAC) recently announced that all of China’s Special Customs Supervision Zones (SCSZs), which previously fell under six different categories, will be uniformly renamed as “Comprehensive Bonded Zones” (CBZs) later this year. Not only will the SCSZs be changing names but also their basic function. The new CBZs are expected to serve enterprises engaged in bonded processing, bonded logistics and bonded services.

Since 1990, 113 areas have been approved as SCSZs to meet the needs of economic Asia Briefingdevelopment in China. These areas fall under six categories – bonded zones, export processing zones, bonded logistics parks, cross-border industrial zones, bonded port zones and comprehensive bonded zones – each serving different enterprises and business activities. However, a lack of readily available information regarding the specific functions of each zone has made it difficult for foreign investors to choose the right location for their business operations. The GAC also stated that not all enterprises will be permitted to operate in the CBZs.

In the “Guidelines on Projects Suitable for Entry into the Special Customs Supervision Zones (SCSZs) (Shujiafa [2012] No.196),” three categories of enterprises are highly encouraged to do business in the CBZs.

1. Bonded processing enterprises conducting any of these major types of transactions:

  • Sourcing raw materials from Chinese nonbonded areas
  • Sourcing raw materials from overseas
  • Selling finished goods overseas
  • Selling finished goods to Chinese nonbonded areas

The processing enterprise’s target market will determine which preferential policies apply. If the enterprise is selling to the domestic market, for example, the customs duty on the finished goods must be lower than the duty on the imported raw materials. This means that processing enterprises should avoid high consumption rate products such as tobacco, cosmetics and luxury goods.

2. Bonded logistics enterprises conducting any of these major types of transactions:

  • Importing goods stored in the bonded zones without a time limit
  • Importing goods to be transferred between CBZs
  • Packaging and assembly of imported goods
  • Transporting imported goods to Chinese nonbonded areas
  • Transporting imported goods to foreign countries after basic processing

3. Bonded service enterprises providing any of these major services:

  • Research, testing and maintenance
  • Exhibiting imported goods in special areas inside or outside of the bonded zones approved by customs
  • Outsourcing, including information technology outsourcing (ITO) and business process outsourcing (BPO)

Four categories of enterprises are not permitted for operations in the bonded zones:

  • Manufacturing and processing enterprises that are oriented to the domestic market and that make products whose import duty is higher than the duty on the related raw materials. As a result, high consumption rate products such as tobacco and cosmetics cannot be processed in the zones.
  • Enterprises mainly operating a nonbonded business, which concerns goods sourced from the domestic market or imported via general trade.
  • Manufacturing enterprises focused on domestic raw materials and high export duty products (or controlled export products).
  • Manufacturing enterprises processing high energy consumption or high pollution products, or other products prohibited by the government.

The following preferential tax policies apply to enterprises operating in the zones:

  • Import tariff exemptions apply to machinery, equipment and other materials used in infrastructure construction, a reasonable quantity of office supplies and spare parts used for maintenance.
  • Import goods brought into the zones may be exempt from import tariffs.
  • Goods traded between enterprises in the bonded zones are exempt from VAT and consumption duties.

This article was first published on China Briefing.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies, with operational offices across China, Hong Kong, India, Singapore and Vietnam, as well as liaison offices in Italy and the United States.

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