Doing Business in China - Special Economic Zones, SEZs

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Special Economic Zones in China

Special Economic Zones(SEZ's) are development zones established by the PRC to encourage foreign investment in China, bringing much need jobs, technical knowledge, and future tax revenues in return for significant tax concessions at start-up of the operations and over a number of years. They are not unlike SEZs in other part of the world.

Current SEZ's are located in:

Guangdong Province
Fujian Province
Hainan Province
Hunchun
Pudong Development Zone(Shanghai)

Benefits of an SEZ:

The biggest benefit to the foreign investor is significant tax concessions during the early life of the project. These rates can vary by site and are subject to change from time to time. A typical example of the PRC tax concessions offered to a manufacturing startup typically looks like:

No tax during start-up years before making a profit
The first year that your company makes a profit starts the "Tax Clock" and is year one
The first and second year after the tax clock starts, there is no tax.
For years three and four, there is 1/2 of the normal tax rate.
In the fifth year, the company pays the full normal tax rate.

It is important to investigate these issues for the SEZ you are planning to operate in. Rules and percentages are subject to change at any time. Ask about both the PRC and province taxes. If the initial offer seems to be significantly less than described above, do further investigation and probe into whether the comments you have heard are just an opening position. Also contact manufacturing companies that have already begun operations to see what they were offered.

The PRC is investing significant resources into developing and/or improving the infrastructure located both within the SEZ and in support of the SEZ. Infrastructure investments in these SEZ's are usually quite apparent vis-a-vis the surrounding areas when you visit them

SEZ's also often have spec building suitable for your operations, that afford quicker start-up. Caution and diligence are required in investigating the site as a spec building in China will be far less complete than a spec building in other industrialized nations. Plan on spending significantly higher capital investment on leasehold improvements. More on Capital for spec buildings

CAUTION: Do not be fooled into the belief that starting up your manufacturing operation in an SEZ will either provide easy or automatically approval for domestic sales rights.

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