So, Hainan is officially “closed.” No, the island isn’t shutting down—far from it. The “island-wide customs closure” that began on December 18, 2025, marks Hainan’s transformation into a “special customs territory,” opening a new chapter of unprecedented opportunity, especially for manufacturers and processors.
At the heart of this new era is a powerful incentive designed to transform Hainan into a high-value manufacturing hub: the Processing Value-Added (PVA) Tax Exemption Policy. In simple terms, if your company in Hainan manufactures goods with imported components, and the value you add during processing exceeds 30%, you can sell those goods into Mainland China completely exempt from import tariffs.
This isn’t just a minor cost saving; it’s a monumental shift in competitive advantage. For international businesses looking to access the vast Chinese market or for domestic firms optimizing their supply chains, understanding and leveraging this policy is crucial.
Let’s break down exactly how it works, how to qualify, and how to ensure you stay compliant while maximizing your profits.
Understanding the Core: What is the 30% Processing Value-Added Rule?
The policy, detailed in official documents like the Measures of Customs of the People’s Republic of China for the Administration of Taxation on Processing Value-Added Duty-Free Goods in Hainan Free Trade Port (Customs Announcement No. 158 of 2025), is elegant in its design but specific in its execution.
Eligible Enterprises: You must be a “Encouraged Industry Enterprise.” This means your business activities must fall within Hainan’s “Encouraged Industry Catalog,” which has been expanded to over 1,100 items covering sectors like bio-pharmaceuticals, high-end food processing, green manufacturing, and digital economy. Your company must also be registered in Hainan with independent legal person status and complete a filing on Hainan’s designated public information service platform.
Eligible Goods: The finished product must contain imported materials. These imported materials can be either:
- Bonded Goods: Materials under customs supervision where duties are deferred.
- “Zero-Tariff” Goods: Materials imported into Hainan from overseas that are outside the Hainan FTZ Import Taxable Goods Catalogue and enjoy exemption from import关税, VAT, and Consumption Tax.
The magic number is 30%. The value you add through manufacturing or processing in Hainan must be equal to or greater than 30% of the total value of all materials used (both imported and domestically sourced in China).
The Crucial Calculation: How is the 30% Figure Determined?
This is where accuracy is paramount. The official formula is:
[(Finished Goods Sales Price - Value of Imported Materials - Value of Domestically Procured Materials) / (Value of Imported Materials + Value of Domestically Procured Materials)] x 100% ≥ 30%
Let’s demystify each component:
- Finished Goods Sales Price: The transaction price when you sell the processed goods from Hainan into Mainland China (the “domestic market” or “neidi”). This must be determined according to standard customs valuation rules.
- Value of Imported Materials: The transaction price of the imported components, including costs like insurance and freight to the point of entry into China.
- Value of Domestically Procured Materials: The price of any raw materials or components you purchase within China (including from other parts of Hainan), excluding domestic VAT. Crucially, the value of Hainan-originated products—goods substantially produced in Hainan—can be deducted from this domestic materials value, making it easier to hit the 30% threshold.
Example for Clarity:
Imagine a Hainan electronics company imports circuit boards (Zero-Tariff) for $700,000. It purchases domestic casings and packaging within China for $200,000. After assembly and programming in Hainan, it sells the finished smart device to a buyer in Shanghai for $1,300,000.
- Value Added = $1,300,000 – $700,000 – $200,000 = $400,000
- Total Material Value = $700,000 + $200,000 = $900,000
- Processing Value-Added Rate = ($400,000 / $900,000) x 100% = 44.4%
Since 44.4% > 30%, this shipment would qualify for exemption from import tariffs when entering Mainland China. Only import VAT and Consumption Tax would apply.
The Game-Changer: Cumulative Value-Added Calculation
One of the most significant features for complex supply chains is the cumulative calculation rule. Value addition can be aggregated across multiple, related “filed enterprises” within Hainan’s industrial chain.
If Company A (upstream) performs initial processing on imported materials and sells its semi-finished product to Company B (downstream) within Hainan, and Company B further processes it before selling to the mainland, their individual value additions can be summed together to see if the total meets the 30% threshold.
This encourages the formation of industrial clusters within Hainan and allows specialized manufacturers to benefit from the policy even if their individual processing stage doesn’t reach 30%.
The Compliance Roadmap: How to Apply and What to Expect
Enjoying this benefit isn’t automatic. It requires proactive steps and meticulous record-keeping.
1. Enterprise Filing: Before your first application, your company must complete a filing process. This involves submitting an application and supporting documents to the designated Hainan provincial authorities (overseen by the Department of Commerce) for approval. Once approved, you file your enterprise information, product details, and processing data on the provincial public information platform linked to Customs.
2. Accurate Self-Assessment & Declaration: For each eligible shipment bound for the mainland, you are responsible for accurately calculating the PVA rate and declaring it to Customs through the “Single Window” system. You bear full legal responsibility for the truthfulness, accuracy, and completeness of this declaration.
3. Automated Approval & Verification: If your declared PVA rate is 30% or above, the Customs system will automatically generate a “Domestic Sales Import Tariff Exemption Confirmation Number.” You use this number to complete the import declaration formalities into the mainland, exempt from tariffs.
4. Customs Oversight – Audit & Verification: Don’t assume it’s a “set and forget” system. Customs employs a risk-based post-audit approach. They will dynamically collect risk information and conduct sampling audits on declared PVA rates, prices, product classifications, and origin. They also have the authority to conduct on-site inspections and audits of your accounts and operations.
Key Pitfalls and Pro-Tips for Success
- Exclusions Apply: The tariff exemption does NOT apply if your imported materials or finished goods fall under specific trade remedy measures (like anti-dumping duties), tariff-rate quotas, or retaliatory tariffs.
- “Simple Processing” is Disqualified: Operations deemed as “simple” or “minor processing” won’t count. The regulations explicitly exclude processes like simple mixing, repackaging, labeling, splitting, or simple cutting/grinding. Substantial transformation is key.
- Documentation is King: Maintain impeccable, verifiable records of all transactions: purchase invoices for all materials (import and domestic), production cost records, and sales contracts for the finished goods. Your calculation must be fully traceable.
- Validate Your Supply Chain: This policy’s integrity relies on accurate declarations from every link in your chain. If you are sourcing semi-processed goods from another Hainan company to benefit from cumulative calculation, how confident are you in their cost accounting and compliance? A flaw in their data can jeopardize your entire shipment’s eligibility and expose you to risk.
This last point is critical. Engaging with new partners in Hainan’s dynamic new environment requires more than just optimism. Verifying the legal standing, financial health, and operational legitimacy of potential partners is a fundamental step in risk management. Thorough due diligence can prevent costly compliance failures and protect your investment. Services that provide verified business credit reports and official company documents are not just administrative tools; they are essential shields in this new frontier of opportunity.
The Hainan PVA policy is a powerful engine for profit. By understanding its mechanics, preparing a robust compliance framework, and intelligently verifying the ecosystem you operate in, your business can truly harness its potential.
For further reading and official reference, you can access key policy documents here:
- Notice on the Tax Policies for Goods Entering and Exiting the “First Line” and “Second Line” and Circulating Within the Island in Hainan Free Trade Port (Cai Guan Shui [2025] No. 12)
- Hainan Free Trade Port Import Taxable Goods Catalogue (Cai Guan Shui [2025] No. 13)
- Hainan Free Trade Port List of Goods and Articles Prohibited or Restricted from Import and Export