The central government of the People’s Republic of China (PRC) as well as provincial and city level governments across the country have announced numerous incentives and supporting measures to assist companies, including wholly foreign owned enterprises (commonly referred to as WFOEs) and Sino-foreign joint ventures, in resuming production and operations that were adversely impacted by the COVID-19 outbreak. In China, provincial and municipal governments often have discretion to implement specific rules pursuant to broad policy guidelines or requirements issued by the central government so long as the local rules do not provide benefits or incentives that are lower than that provided in the national guidelines. Accordingly, companies should confirm the local rules at provincial or municipal levels as specific implementing measures may vary.
Some of the programs that may be available to multinational companies operating in the PRC, including the following:
1. Central Government Incentives to Support Resumption of Production
a. Preferential Tax Measures. The PRC’s State Tax Administration (SAT) announced on February 6 a series of preferential tax measures to encourage resumption of industrial production including employment. One of the measures allows companies in certain industries severely affected by the epidemic to offset 2020 losses for a longer than standard period of time (8 years, instead of 5). Qualifying industries include transportation, catering, accommodation, and tourism. The portion of the revenue generated from business activities in the qualifying industries must account for more than 50% (excluding non-taxable income and investment income) of total revenue in 2020. Separately, the PRC Ministry of Finance (MoF) and SAT Announcement  No. 8 provides that companies engaging in production of key personal protective equipment (PPE) (e.g., facial masks, protective clothes) may deduct the costs of purchased equipment in a lump sum from applicable PRC corporate income tax (CIT). In addition, donations from companies to public welfare organizations, governmental agencies, or directly to hospitals responsible for epidemic control are entitled to a full deduction from taxable income, under MoF and SAT Announcement  No. 9.
b. Import Exemption. Under MoF Announcement  No. 6, the importation of donated supplies used for prevention and control of the epidemic, such as reagent, disinfection equipment, and protective supplies, is exempt from import duties, import VAT, and consumption tax. For donated supplies from the United States, no retaliatory tariffs would be imposed on such donated supplies. This policy is applicable to imports between January 1, 2020 and March 31, 2020. Import tariffs during that period can be refunded if they were not used to offset the importer’s output VAT. Importers may claim refunds before September 30, 2020.
c. Payroll Exemptions. The Ministry of Human Resources and Social Security (MHRSS), MoF and SAT jointly issued a notice (Social Security Ministry Announcement  No. 11) on February 20, 2020 to allow provincial and municipal governments to exempt small and medium enterprises from making company contributions to social insurance programs for up to five months, and large enterprises from fifty-percent (50%) of the company contributions, for up to three months. Provincial and municipal governments have implemented this announcement as highlighted below.
2. Provincial and Local/Municipal Incentives
Many other incentive and support measures have been announced at the provincial and municipal levels, including:
a. Hubei Provincial Measures. The provincial government of Hubei, which suffered most of the adverse economic impact of COVID-19 in China, issued the Hubei Provincial New Corona Virus Infection Prevention and Control Headquarters Notice on March 11, 2020. It provides that Wuhan-based companies essential to epidemic prevention and control (e.g., including the manufacture of PPE), public utilities operations (e.g., water supply), daily necessities (e.g., sales of food, fruits, meat and eggs), and agricultural production (e.g., seeds and fertilizer), are permitted to resume production. Companies that are significant to national and global supply chains can also resume production if approved by the authorities. In areas considered medium or low risk, there a broader range of companies is allowed to resume production. However, businesses on the “negative list”, such as cinemas, bookstores, bars, gyms and restaurants, cannot resume work before the epidemic ends. Most notably, all companies in Hubei, including wholly foreign-owned enterprises and joint ventures, are also temporarily exempt from payment of pension, unemployment, and work injury insurance contributions according to an announcement issued by the Hubei Provincial government on March 27, 2020.
b. Shanghai Municipal Measures. In Shanghai, a number of measures have been implemented to reduce the financial burden on employers. For example, employers that have not laid-off employees, or attempted to minimize the number of employees laid-off, may receive a refund on their payment of unemployment insurance premiums of fifty percent (50%). Pursuant to the central government joint notice referenced above, the local Shanghai Branch of the MHRSS has implemented an exemption for (a) small and medium sized enterprises in Shanghai to make company contributions to the three social insurance programs between February to June this year, and (b) for large enterprises, a fifty-percent (50%) reduction in company contributions to the three social insurance programs between February and April.
c. Measures in Beijing and Guangdong Province. The Beijing Municipal Government has similarly introduced measures to reimburse small and medium sized companies for their payments of unemployment insurance premiums if the companies’ reduction in force is below certain thresholds, and to provide companies a reduction (large enterprises) and exemption (small and medium enterprises) in the amount of company contributions to social insurance programs. Guangzhou and Guangdong Province have also allowed companies to delay contributions to social insurance programs without penalty.
Observations and Recommendations
China, having faced unprecedented public health and economic damage, is now turning to recovery in many dimensions. Multinational companies should evaluate their operations in China to see if they are eligible to benefit from these incentives and supporting measures. If you believe your company may be eligible for any of these incentive and support measures, we recommend:
- Seeking information on qualifying requirements; explore prima facie eligibility; move quickly – some of the programs have a short eligibility or claim period.
- Considering all forms – national, provincial, and municipal – that may apply.
- Understanding the risks, documentation requirements, audits, and the overall enforcement environment based on the specific measure itself under consideration.
We note that with many of the measures described above, the text often does not specify which “authorities” have jurisdiction, which raises uncertainty with respect to implementation and enforcement.
Crowell & Moring is monitoring stimulus programs being considered in major markets around the world and will provide periodic updates on our Coronavirus Resource Center.