Tibet and Xinjiang have become a draw for China’s wealthy... in search of low taxes

Tibet and Xinjiang have become China’s answer to the British Virgin Islands, as celebrities such as Zhao Wei and Fan Bingbing as well as tycoons scramble to set up companies in areas with preferential tax terms.

The practise has come under the spotlight after actress Zhao Wei raised eyebrows with her 3 billion yuan (US$440 million) bid for a Shanghai-listed animation company. The venture involved in the later-abandoned takeover, called Longwei Culture & Media, was based in Lhasa, the capital city of Tibet.

Renowned as the spiritual centre at the foot of Himalayas, Lhasa, however, is seen as one of the lowest-income places in China with its economy heavily dependent on agriculture. For decades, few of the country’s affluent would consider investing in the remote inland city isolated from China’s cosmopolitan centre on the east coast.

But as Beijing struggles to lift Tibet and Xinjiang, two inner areas occasionally troubled by acts of ethnic violence, out of poverty, the regions have been assigned preferential tax policies in an effort to entice affluent investors.

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“They have virtually become China’s version of British Virgin Islands,” said Shen Meng, executive director with boutique investment bank Chanson & Co. in Beijing, referring to the Caribbean tax haven.

Thanks to a package of tax breaks, companies registered in Tibet are subject to a corporate tax rate of 15 per cent, well below the national standard rate of 25 per cent. The overall tax rate can drop to as low as 9 per cent as a result of other incentives granted by local governments.

Liu Yonghao, China’s 36th richest man who controls agricultural group New Hope Group, has a number of business based in Tibet, including Southern Hoper Industry Co and Tibet Hengye Feng Industrial Co that hold stakes in Hong Kong-listed Hua Xia Healthcare and TVB.

“Today, you can easily find an agent making money out of helping people register companies in Tibet or Xinjiang. The approval process does not take long,” Shen said.

Most recently, the Chinese border town Khorgos city in Xinjiang has drawn attention from celebrities such as Fan Bingbin.

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The northwestern city, at the doorstep to Kazakhstan, is home to the production companies behind top-grossing blockbusters Chongqing Hotpot and Buddies in India. Both films were backed by Khorgos Youth Enlight Pictures Co, a unit of Chinese media giant Beijing Enlight Pictures.

In August, actress Fan Bingbing set up her own media vehicle Khorgos Ai-mei-shen Film & TV Cultural in the city. Others launching Khorgos vehicles include actress Yang Mi, company registration records showed.

Khorgos offers an even more favourable raft of polices and sweeteners than Lhasa, making it the most favourable territory in terms of preferential taxes, according to industry experts.

Khorgos, which is designated a “National Special Economic Development Zone,” can provide companies income tax-free waivers for the first five years following registration, in addition to concessions on employee income tax and VAT bills.

“A different company address can save you millions of dollars,” Shen said.

However, it remains a question how the economies in Tibet and Xinjiang will benefit from their special tax regime, as companies in labour-intensive industries such as manufacturing are reluctant to relocate due to transportation costs.

“You can set up a firm there, but you don’t have to hire people there,”Shen said. “So the influx of such companies is not likely to improve local employment,” Shen said.