By Jo Doolan
As China continues to lead the world in renewable energy, indices prepared by global accounting firm Ernst & Young show there are future growth opportunities for New Zealand companies in this sector, along with tax incentives in China and tax exemptions in New Zealand.
Many assume China is focused on growth at any cost and is not overly concerned about environmental issues. These assumptions are not supported by the factual data.
China’s commitment to the green sector is budgeted to be RMB3.4 trillion (NZD$680 billion) within the next five years. These projects are designed around improvements to China’s water, air and pollution control, together with a focus on reducing emissions and preventing pollution from heavy metals and hazardous chemicals.
China’s Foreign Investment Catalogue reflects the approach being taken to encourage investment in environmentally-friendly and high-tech projects. These include the construction and operation of renewable water plants, research and development, the manufacture of new light-weight and environment -friendly materials for aviation and aerospace use, and gear transmission manufacturing for use in wind power.
New Zealand companies operating in the environmental space and with high tech capabilities have a great opportunity to expand.
Along with benefits such as tax holidays in China, other benefits will flow from structuring the investments to qualify for the New Zealand tax exemptions via the active business exemptions for Controlled Foreign Companies.
Most NZ businesses seeking to tap into Chinese renewable energy and environmental protection projects must operate through a wholly-owned foreign entity rather than using a representative office. The rules for representative offices have recently been updated and their use is now limited.
By planning ahead and using the right structure, foreign investors can reap benefits from the Chinese government’s new tax incentives for the renewable energy sector.
Some sectors will qualify for a 15% corporate tax rate while others are eligible for a three year tax holiday and a 50% reduction for the following three years. Others may also qualify for a 100% refund of VAT.
The 15% rate is offered for qualified, advanced and new technology enterprise. Applicable sectors include solar energy, wind energy, biomaterial energy and geothermal energy.
Revenues earned from certain projects, including hydrofluorocarbons, perfluorocarbons, and nitrous oxide projects, are eligible for a three-year exemption tax holiday and a 50% reduction in the following three years.
Further incentives are available to attract technologies and encourage investment in environmental protection and remediation projects.
A three-year tax exemption is available, along with another 50% reduction for the following three years, for income derived from qualified environmental protection and energy or water conservation projects. Applicable fields include biomaterial energy, synergistic development and utilisation of methane, and technological innovation in energy conservation and emission.
Other tax relief is available to eligible green companies. For example, a 100% refund of VAT is paid on the sale of biodiesel oil generated from using abandoned animal fat and vegetable oil. VAT paid on the sale of goods produced from recycled materials or waste residuals is refundable. Sewage treatment services are VAT-exempt.
The catalogue includes significant changes to encourage investment in emerging industries which promote more value-added and technology-based sectors, while discourage investment in project which could lead to environmental degradation or sectors where sufficient foreign investments already exist.
If New Zealand businesses establish a wholly-owned foreign company in China that is conducting an active business, they can qualify for tax exemptions in New Zealand.
Previously it was self- defeating to have a tax exemption offshore only to have the New Zealand tax net remove any benefits businesses were getting. Changes to our controlled foreign company rules mean this income is not only able to be earned in China tax- free but can also be repatriated to New Zealand without any further taxes, providing it is paid to a New Zealand company (or similar entity).
There is still the challenge of not having the imputation credits to pay this money out to individual shareholders but the new rules are a huge improvement. New Zealand business can now afford to be competitive in offshore markets.
- Joanna Doolan is the partner in charge of the Ernst Young New Zealand China Overseas investment network. Florence Wong is the Ernst & Young leader of the group.