Hainan’s Tax Law

On 11 April 2018, the Central Committee of the Communist Party of China and the State Council issued the Guidelines for Supporting Hainan in Deepening Comprehensive Reform and Opening-Up, marking the gradual formation of what is touted as the most open free trade port in China. On June 1, 2020, the Central Committee and the State Council released the Overall Plan for the Construction of the Hainan Free Trade Port, followed by the National People’s Congress Standing Committee’s approval of the Hainan Free Trade Port Law of the People’s Republic of China on 10 June 2021. These milestones provided a foundational framework and principles for the development of the Hainan Free Trade Port, accelerating the formulation and implementation of various open policies. Among these policies, tax reforms have garnered significant attention from both individuals and businesses. Many promotional materials claim that Hainan’s tax advantages could surpass those of Hong Kong and Singapore, positioning it as the "offshore" destination of choice for Chinese individuals and enterprises venturing abroad.

This article introduces the tax policies for individuals and enterprises in Hainan, analyzes the pros and cons of Hainan’s tax policies compared to Hong Kong—a traditional offshore hub—from an international tax perspective, and explores how Chinese businesses can leverage Hainan’s tax policies.

I. Individual Income Tax Policies in the Hainan Free Trade Port

According to several regulations, including the Notice on Individual Income Tax Policies for High-End and Urgently Needed Talents in the Hainan Free Trade Port issued by the Ministry of Finance, the State Taxation Administration, and the Hainan Provincial Government, individuals classified as high-end or urgently needed talents working in the Hainan Free Trade Port can enjoy preferential tax treatment. Specifically, for comprehensive income, business income, and talent subsidies recognized by Hainan Province, any amount of tax paid exceeding 15% of taxable income can be exempted and claimed during the annual tax reconciliation process.

Starting in 2025, individuals who reside in the Hainan Free Trade Port for at least 183 days within a tax year will enjoy a progressive three-tier individual income tax rate of 3%, 10%, and 15% on their comprehensive and business income sourced from within the Hainan Free Trade Port.

1. Advantages of the Individual Income Tax Policy

• Even individuals who are not classified as high-end or urgently needed talents can enjoy the tax benefits if their annual salary exceeds RMB 300,000, making the threshold relatively low.
• Taxpayers can directly pay taxes at the 15% rate during the annual reconciliation, unlike the Chinese Greater Bay Area’s tax incentives, which require individuals to pay taxes under the original system and then apply for a refund.
• The tax rate will be further reduced starting in 2025.

2. Conditions for Enjoying the Policy

• Individuals must sign a labor contract or employment agreement of at least one year with an enterprise or unit registered and substantively operating in the Hainan Free Trade Port. The requirement for substantive operations prevents scenarios like celebrities setting up shell companies in Horgos purely for tax avoidance. This makes it difficult for “tax migrants” who only pay social insurance in Hainan but do not actually reside there.
• The tax incentives do not apply to all types of personal income. Passive income, such as dividends, interest, and capital gains, is not eligible for preferential treatment.