For decades, it has been common practice that local governments attract investors by offering them various financial incentives mostly in the form of subsidies. Such incentives include reduced prices for land use rights and return of parts of the granting fees paid, return of such parts of taxes which stay on the local level, etc. They are usually agreed in investment agreements concluded between the local government and the investor. Legally speaking, such arrangements were always in a grey area.
Already in 2000 the PRC State Council (“State Council”) had issued the Circular on Rectification of Policies of Tax Rebates Privately Formulated by Local Governments stating that tax rebates by local governments are not allowed. However, in order to attract new investment, all local governments ignored such attempts of the Central Government to rule them in and continued their practice. What was changed was only the name, i.e. calling the payments not “pay back” or “return”, but “subsidy”. It seems that with the arrival of the policy of “New Normal”, this practice is about to end.
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