China’s First Tier Cities Compete to Attract Foreign Headquarters

December 8, 2011 Posted by China Briefing Reading Time: 6 minutes

Setting up regional headquarters in Shanghai, Beijing, Guangzhou and Shenzhen

Dec. 8 – China’s first tier cities – faced with various challenges during industrial upgrading and an economic transition – are scrambling to attract foreign-invested enterprises (FIEs) to set up regional headquarters (RHQ) in their jurisdictions.

The cities of Beijing, Shanghai, Guangzhou and Shenzhen have all announced regional incentives to attract foreign RHQs as they try and create cluster effects and optimize resource distribution.

Recognition of RHQs
In Beijing and Shanghai, two types of FIEs – investment holding companies and management companies – can apply for the RHQ status if they meet certain criteria.

According to the “Provisions on the Establishment of Investment Holding Companies by Foreign Investors (MoC Decree [2004] No.22)” released by the Ministry of Commerce (MoC) in 2004, applicants shall meet the following standards to apply for the establishment of a foreign investment holding company:

1) The foreign investor shall have its total asset value reach no less than US$400 million during the year previous to the year of application and own an FIE in China with a total paid-in capital exceeding US$10 million; or 2) Own no less than 10 FIEs in China with a total paid-in capital exceeding US$30 million
In case of a joint venture, the Chinese investor shall have its total asset value reaching no less than RMB100 million during the year previous to the year of application; and
The registered capital of the investment holding company shall be no less than US$30 million

Any foreign investment holding company that has already been settled in Beijing or Shanghai upon approval is eligible to apply for the RHQ status.

Foreign-invested management companies registered in Beijing and Shanghai shall meet the following criteria in order to apply for RHQ status:

The total asset value of the parent company shall be no less than US$400 million
1) The parent company’s total paid-in capital in China shall be no less than US$10 million and the number of companies (in and outside China) the parent company is authorized to control shall be no less than three; or 2) The number of companies (in and outside China) the parent company is authorized to control shall be no less than six
The registered capital of the foreign-invested management company shall be no less than US$2 million

Guangzhou has updated its RHQ recognition standards in 2010 and allows Guangzhou-registered FIEs with various functions – including investment holding, management, R&D and production – to apply for RHQ status if they:

Have investment in, or are authorized to control, no less than three enterprises in and outside China
Meet one of the following criteria:
1) Meet related capital/revenue/tax contribution standards specified for different industries in the “Guangzhou RHQ Recognition Standards (suifuban [2010] No.75)”
2) Invested in by a Fortune 500 company
3) Approved and established as an investment holding company
4) Included in the list of top 500 Chinese companies or the list of top 100 Chinese chain operators
5) Listed in the top 10 by business revenue among enterprises engaged in certain emerging strategic industries – such as new energy, information technology, new materials, life sciences and marine industries

Shenzhen-registered FIES which intend to apply for RHQ status shall meet the following basic requirements to start with:

Engaged in industries that are encouraged in Shenzhen
Receive no less than 30 percent of its business revenue from its subsidiaries
Have no less than three subsidiaries outside Shenzhen

In addition to the basic requirements listed above, Shenzhen also specified RHQ recognition standards for FIEs of different sizes:

Favorable treatment to RHQs
The four cities’ local governments have granted various favorable policies to their RHQs.

1. Rewards/subsidies for RHQ establishment

Beijing: A one-time subsidy amounting to between RMB5 million and RMB10 million for RHQs established after January 1, 2009 and with a registered capital of no less than RMB100 million
Shanghai: A subsidy amounting to RMB5 million for newly-established RHQs
Guangzhou: A one-time reward for RHQs established in Guangzhou in and after 2010; the reward amounts to 50 percent of the RHQ’s local tax contribution during the year when the reward is given
Shenzhen: A five-year reward for newly-established RHQs; the reward amounts to 30 percent of the growth in the RHQ’s local tax contribution compared to the previous year

2. Rewards for high-revenue RHQs

Beijing: A three-year reward for RHQs that see annual business revenue exceed RMB100 million for the first time
Shanghai: 1) A one-time reward amounting to RMB10 million for foreign investment holding RHQs that see their annual business revenue exceed RMB1 billion for the first time; 2) A one-time reward amounting to RMB5 million for foreign-invested management RHQs that see their annual business revenue exceed RMB500 million for the first time
Guangzhou: Rewards for RHQs with high (over RMB10 million in total) and fast-growing (increasing by RMB5 million from the previous year) local tax contributions
Shenzhen: A one-time reward for RHQs that increase their capital by over RMB200 million; the reward amounts to 50 percent of the y-o-y growth in the RHQ’s local tax contribution calculated from the tax year following the capital increase

3. Subsidies on renting, building and purchase of offices

Beijing: 1) A three-year subsidy for office rent, amounting to 30 percent, 20 percent and 10 percent of annual rents; 2) A one-time subsidy amounting to RMB1,000 per square meter for building and purchase of offices
Shanghai: 1) A three-year subsidy on office rent, amounting to 30 percent of the standard annual office rent; 2) A one-time subsidy on building and purchase of offices; the subsidy amounts equally to the total of the three-year rent subsidy
Guangzhou: 1) A one-time office rent subsidy amounting to 30 percent of annual market rent; 2) A three-year subsidy on building and purchase of offices; the subsidy amounts to 30 percent of the office property’s annual local property tax contribution
Shenzhen: 1) An office rent subsidy amounting to 30 percent of the annual market rent; 2) A one-time subsidy on building and purchase of offices; the subsidy amounts to RMB1,000 per square meter of the office space

In addition to the aforementioned incentives, the four cities also offer rewards to key individuals at each RHQ, grant convenient visa procedures to foreign employees, and put preferential policies in place to support RHQ regional talent recruitment.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. For further advice and specifics relating to setting up regional headquarters in China, please email china@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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