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Starting from December 1, 2020, independent legal entities registered in Hainan gained access to import certain raw materials and auxiliary items without incurring import duties, import value-added tax (VAT), and import consumption tax. These materials can be utilized for self-production, processing trade, or service trade activities aimed at exporting final products or services abroad.

The zero-tariff policy for raw and auxiliary materials operates under a positive list management system, covering a spectrum of goods such as agricultural produce, resource items, chemicals, optical fiber preforms, and components necessary for aircraft and ship maintenance. This positive list stands as one of four lists – one negative and three positive – within the Hainan Free Trade Port’s ambit of “zero tariff” policies. The release of the first list precedes the anticipated unveiling of the remaining three lists in the near future.

Moreover, on November 27, Hainan authorities granted state-owned enterprises (SOEs) within the Hainan FTP the liberty to list securities on foreign stock exchanges.

The announcement from three Chinese authorities – the Ministry of Finance (MOF), the General Administration of Customs (GAC), and the State Taxation Administration (STA) – released a Notice on “Zero Tariff” Policies for Importing Raw and Auxiliary Materials to Hainan Free Trade Port (Cai Guan Shui [2020] No.42) on November 12, 2020.

According to this notice, the exemption from import duties, import VAT, and import consumption tax applies to raw and auxiliary materials listed in the positive list imported to Hainan Free Trade Port (FTP) under specific conditions:

The applicant should be an independent legal entity registered in Hainan FTP. The imported raw and auxiliary materials must be for self-production, processing activities aimed at exporting final products, or service trade activities intended for overseas markets. This “zero tariff” policy, effective from December 1, 2020, remains in force until 2025 when island-wide independent customs operations are anticipated to be in place.

The positive list encompassing zero-tariff raw and auxiliary materials is subject to dynamic adjustments by relevant departments, based on the practical demands and regulatory conditions in Hainan.

The comprehensive positive list comprises 169 items, each identified by distinct eight-digit HS codes. It spans agricultural products (e.g., coconut and barley), resource materials (e.g., ore, coal, crude oil, liquefied natural gas, and wood), chemical raw materials (e.g., xylene, methanol), optical fiber preforms, and spare parts for aircraft and ship maintenance. However, tax exemption for aircraft and ship maintenance spare parts necessitates meeting specific conditions.

Implications of the Zero Tariff Policy:

This policy presents a favorable landscape for reducing operational and capital costs for manufacturing and processing enterprises, fostering growth in sectors like aviation, aircraft maintenance, ship maintenance, and processing and assembly.

An instance of the policy in action: On December 1, Hainan Airlines Holding Co., Ltd. imported meteorological radar transceivers valued at RMB 3.8 million (US$580,000) and stands to be the inaugural beneficiary of the zero tariff policy. Following customs clearance, the imported transceivers could enjoy a tax exemption of RMB 530,200 (US$80,687), as reported by Xinhua.

However, entities seeking to leverage this tax exemption should be aware of the accompanying restrictive conditions. The Notice specifies that these zero-tariff materials, once imported, are designated for use by Hainan-registered entities, subject to customs supervision, and cannot be transferred within or outside the island. Any transfer or sale to entities within Hainan or the Chinese mainland necessitates tax payment and requisite customs formalities.

Consequently, prior comprehension of material usage and final product destinations is advisable before importation.

Background Context:

China outlined the Overall Plan for the Construction of Hainan FTP on June 1, 2020, envisioning Hainan’s transformation into a leading free trade port worldwide. This plan introduced an array of preferential policies, including zero tariff policies on specific imported goods.

The aim is to implement island-wide independent customs operations and a simplified tax regime in Hainan by around 2025. Post this, imported goods – except those in the forthcoming Negative List of Commodities Subject to Import Taxes and goods prohibited by law – will be exempt from import duties.

Until the island-wide customs operations are established, certain imported goods under list management categories, such as production equipment for self-use, specified raw and auxiliary materials, transportation means like ships, aircraft, and goods for residents’ consumption in Hainan, will enjoy exemption from import duties, import VAT, and import CT.

These lists remain subject to dynamic adjustments based on Hainan’s practical needs and regulatory conditions.

Encouraging Global Trade:

In a move to actively engage Hainan in global trade and attract foreign capital, the State Administration of Foreign Exchange (SAFE)’s Hainan bureau enacted the Administrative Measures for Pilot Registration of Overseas Listing of Companies in the Hainan FTP on November 27, 2020. This measure grants SOEs in Hainan the authorization to issue and trade securities on foreign stock markets upon approval from the China Securities Regulatory Commission (CSRC).

The policy took effect immediately upon promulgation, enabling SOEs registered in Hainan to execute, modify, or cancel registrations for overseas share listings through banks under the jurisdiction of the Hainan bureau of the SAFE.