China's State Council has just made public a notice
(Circular 25) dated 10 May 2015, clarifying a few preferential
The new notice is a follow-up to a late 2014 State Council
circular (Circular 62) that required local governments to
'clean up' preferential investment policies and eliminate
those that did not comply with central government policies, from
preferential land pricing to local tax refunds. Local governments
were required to report the status of such policies to the central
government by the end of March 2015.
As a result of Circular 62, local governments who had offered
tax and non-tax incentives as part of their efforts to attract
outside investment into their area were forced to put these
incentives on hold, including any incentives that were set forth in
investment contracts signed with investors.
This raised concerns that these incentives would be
retroactively invalidated, even though they were negotiated in good
faith and agreed to by local governments in existing investment
The newly issued notice, however, confirms that certain
incentives in existing investment contracts will continue to be
effective and will be honoured.
A few highlights of the new notice:
Preferential policies provided in
existing contracts between the local governments and companies will
continue to be effective.
Preferential policies with a finite
term already made public by local governments will remain effective
throughout that term.
Preferential policies without a
finite term already made public by local governments will need to
be adjusted, but a specific transition period will be given. The
preferential policies will remain effective in the transition
New policies relating to taxes or
non-taxable income should be approved by the State Council before
implementation, unless they are permitted by law or administrative
regulations. Government funding generally should not be tied to a
company's taxes and non-taxable income.
The 'clean-up' work required
by Circular 62 will proceed after arrangements have been made in
the future. This seems to suggest that the 'clean-up'
authorised under Circular 62 will be on hold indefinitely
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Anyone with standard form contracts who deals with small business must review the contracts for potential unfair terms.
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