To foreign investors, the Waigaoqiao Bonded Zone (the "WBZ") in Pudong, Shanghai, is perhaps the best known of the 15 bonded zones in China. Bonded zones were first established in China in the 1990s at a period when the country was heavily geared towards the export market. Consequently, the functions of bonded zones have traditionally been international trade, warehousing and export processing trade. Foreign investors were attracted to zones such as the WBZ by preferential tax policies and various exemptions from customs duty and VAT. Bonded zones are technically considered to be outside the PRC for customs purposes, allowing for deferral of payments of customs duty and import VAT until goods are shipped into "China Proper".

Foreign investors have had a strong incentive for setting up wholly foreign owned operations in the WBZ since the establishment of such trading and distribution companies in the WBZ allowed them to engage in international trade and certain trading activities in China Proper. While technically such companies should have only traded within the zones or carried on international trade, in practice authorities facilitated them to trade outside the zones with entities in China Proper.

Diminishing appeal

The appeal of these two key attractions of bonded zones - the preferential tax policies and the establishment of a WBZ company for trading and distribution purposes - is likely to diminish in the near future due to developments in connection with China's entry to the World Trade Organization ("WTO").

WTO entry has already resulted in lower tariff rates, which means that the advantage of traditional forms of bonded zone whereby it is possible to improve cash flow by deferring tax payments willbe lessened. In addition, new domestic legislation - the Measures for the Administration of Foreign Investment in the Commercial Sector (the "Measures") - effective from June 1, 2004, could also diminish the other key attraction of setting up in the WBZ for the purposes of trading in China Proper. These new Measures put in place a new legal framework for foreign investment in distribution services, and essentially permit wholesale and retail activities to be carried out by authorized companies after December 11, 2004 (or effective now for wholesale and retail companies that qualify under CEPA). Many companies currently carrying on trading from within the zones are likely to be attracted by the possibilities presented by the new Measures and the option of engaging in direct trading and distribution activities on a firmer legal basis.

New logistics zone

The Shanghai government (with support at central level) has responded to these and other issues with the creation of a new Shanghai Waigaoqiao Bonded Logistics Zone (the "New Zone") as part of a wider policy to promote Shanghai as an international logistics and maritime center. To this end the policy stresses the need to properly integrate the WBZ with neighboring ports. This should overcome another shortcoming of the WBZ; although situated close to a port, international shipping and logistics companies have previously encountered bureaucratic and administrative obstructions to fully utilizing the WBZ due to the port and the zone being subject to different authorities.

Legislative basis

The New Zone was approved by the State Council on December 8, 2003 with the issue of the Reply of the Office of the State Council Concerning the Shanghai Waigaoqiao Bonded Zone and Waigaoqiao Port Pilot Project. The Reply sets out the State Council's consent to the New Zone on a trial basis and emphasizes the utilization of both the WBZ and the port. Other key regulations are Opinions on the New Zone issued by various Shanghai governmental authorities on April 8, 2004 (the "Opinions"), which essentially serve as implementing rules for the New Zone, and also an Announcement issued by the General Administration of Customs on April 12, 2004. The Announcement reiterates key tax policies to the effect that the New Zone will enjoy policies applicable to traditional bonded zones and also VAT export refund policies (see below) traditionally only available in certain other types of zone.

Permissible activities within the zone

The main activities permitted within the zone are warehousing and logistics, though some types of limited trading activity and other support services are also included. The Shanghai government encourages multinational companies to use the New Zone as a regional procurement and distribution center, supplying goods to overseas markets, regional markets and the PRC. The New Zone may serve as a hub for international transportation and international sourcing (i.e. the sorting and simple processing of goods sourced domestically and abroad for sale to domestic and overseas destinations), as well as entrepôt trade. In terms of trade, domestic companies registered in the New Zone are granted import and export rights. They may also provide support services such as transportation.

Export tax refund

As well as implementing the existing policies available to traditional bonded zones, the New Zone will offer other advantages including the following.

Perhaps one of the major attractions of the New Zone is the right for the exporters to apply for a VAT refund immediately upon goods being exported to the New Zone from China Proper. This is likely to be a strong incentive for foreign investors. In the past, particularly in relation to processing trade arrangements, in order to obtain the VAT refund or other incentives, some companies in the PRC have exported goods to overseas destinations such as Hong Kong or Japan, and then re-imported them the next day. This would add to logistics costs as such companies usually used airfreight, and would also add to turnaround time. Now, however, the export tax refund will be available as soon as goods are exported into the New Zone. When re-importing goods from the New Zone, import duty and VAT are paid as if importing such goods from overseas.

Preferential tax and duty policies

In addition to the export refund eligibility, another advantage of the New Zone is that free trade within the zone, or between the zone and overseas is not subject to turnover tax or customs duty, or import and export licensing requirements.

Transshipment activities possible

The New Zone has set aside areas for use by shipping companies as container yards for transshipment. Previously, due to policy restrictions, investors were deterred from carrying out transshipment activities in the WBZ. The restrictions do not apply to the New Zone.

The New Zone also streamlines customs formalities and quarantine requirements. Details are set out in the Opinions.

After-delivery clearance

Another benefit of the New Zone is that after-delivery clearance will be possible (subject to customs verification) and will apply to imported goods, and to goods transferred among bonded zones, export processing zones and the New Zone. After-delivery clearance is a customs practice whereby companies are allowed to carry out their import customs declaration on a batch basis after deliveries have been made. In the past, it was available to certain bonded warehouse operators for repair services and to some Waigaoqiao bonded zone companies, particularly foreign-invested distribution companies. After-delivery clearance is usually carried out on a monthly basis and allows for quick preliminary processing by customs and then goods can be transferred to destinations in China Proper without first having to fully clear customs. A bond must be posted to customs that is equivalent to potential customs duty and VAT liabilities.

Who benefits?

Clearly the New Zone should benefit shipping and logistics companies, who will be able to use it as a hub for container consolidation and re-distribution. Such entities will be required to establish a new company within the New Zone, presumably subject to approval from the Waigaoqiao authorities. Manufacturing and other companies will have an option to use the New Zone as a regional procurement / distribution center, or center for export and re-import arrangements.

If you would like to discuss the contents of the above article, please feel free to contact Danian Zhang at (+86 21) 5047 8558 or via email [email protected].