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Shanghai

Key steps to operating in the Shanghai FTZ

The free-trade zone in China’s commercial city is a prime destination for businesses seeking to take advantage of lower taxes and lighter regulation. We advise on the best ways to set up there.


​​​Jan 13, 2015 |  By Richard Morrow |  People & Strategy
Copyright: 2015​​ The Corporate Treasurer​. All rights reserved. 

The Chinese government’s September 2013 announcement ​of its plan to establish a free-trade zone (FTZ) in the Pudong district of Shanghai has led to a raft of demands from local and international businesses to take advantage of the zone’s light touch.

The Shanghai Statistics Bureau estimates that close to 10,000 corporates had registered in the zone as of June 2014 – 661 of which were foreign-invested enterprises. The level of demand is no surprise, given the various tax, clearance and import advantages that companies registered in the FTZ enjoy.

While many of the specific regulations surrounding the zone remain hazy, there are several concrete advantages to be had in terms of ease of establishment and lower taxes.

“Previously, if you wanted to set up a company you needed to be on the government’s list of approved industries in China,” said Joe Zhou, head of China research at Jones Lang LaSalle (JLL). “But in the FTZ, you can register any company as long as the business is not explicitly prohibited on the ‘negative’ list [of permitted activities for foreign companies].”

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Pharmaceutical review organisation USP is one entity to have benefited. It originally established an office in the Zhangjiang bonded zone in 2012, before moving to the FTZ in January 2014. After it did so, the Chinese authorities waived all VAT and customs duties on laboratory equipment and samples for lab use that it imported, with the clearance time for the latter dropping by 50%.

Additionally, its taxes fell. “Our tax costs have been reduced by approximately 25% – about $700,000 – so far this year,” said James Thompson, vice-president for accounting and treasury.
While many international companies stand to benefit from registering in the FTZ, they need to understand the costs and length of time it takes to do so. CT highlights the key steps below.

Set-up time and costs

Companies looking to register in the FTZ will immediately feel the benefits. An international company seeking to establish itself in mainland China must usually wait three to six months for the necessary approvals. The same process only takes two to three weeks in the FTZ, depending on the exact business and whether it infringes upon the ‘negative list’ of allowable activities in the zone.

“If you aren’t on the list, you can do whatever you want in the FTZ,” said Ivan Poon, president for China at CBRE. “If your business is on the list, you need to clarify with the authorities exactly what you intend to do, and they will impose restrictions if they think they are necessary.”

This is a much quicker process than even in Shanghai’s bonded zones, which were designed to entice businesses to establish themselves there. Thompson noted it took UPS two years to establish its first office in Shanghai in 2012. “Back then, the key application was the business scope approval of the business licence. It took us several rounds of discussion with the authority to get the business scope that met our needs,” he said.

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While sorting out the necessary paperwork for the FTZ is far faster today, first time entrants into China will probably need to employ a third-party lawyer or auditor who can liaise with government departments to gain the relevant licences. This can cost Rmb20,000 to Rmb50,000, depending on how many applications are needed and whether it involves translating documents from English, or from a rarer language such as German or Italian.

FTZ’s finite appeal

The FTZ encompasses an area of Pudong stretching from Lujiazui and Waigaoqiao to Yangshan Bonded Port and the Pudong International Airport Bonded Zone. Most commercial buildings here are focused on goods storage or logistics, making it very appealing for these types of companies to have their headquarters in it.

“It makes enormous sense to set up in the FTZ if you are a trading or logistics company,” said Poon. “Under the new regime you can store goods in the FTZ and only send them into the mainland itself when there is genuine demand, paying tax on them when you do so.”

Leasing logistics or warehouse locations in the FTZ costs Rmb1 to Rmb2 per square metre per day for many sites. Poon noted that the average warehouse rent in Waigaoqiao is Rmb1.53 per square metre per day, while it is Rmb1.38 around Pudong airport.

“Logistics and warehouse capacity in the FTZ is not particularly full, so it’s relatively easy to find,” he said.

Property agencies suggest companies set aside six weeks to find an acceptable location to rent within the FTZ. Thompson said USP used a real estate broker to narrow its search down to three greenfield or renovation sites. “While the value of our property has risen, the property rent price as compared with other industrial parks is still reasonable,” he said.