Main preferential policies for venture capital funds

In recent years, venture capital funds have witnessed rapid growth in China and become one of the key financing channels for numerous innovative micro and small enterprises. Compared with other private investment funds, venture capital funds enjoy more benefits in terms of tax policies, divestment, shareholding reduction and lockup policies.

Tax policies. Pursuant to relevant provisions of the Notice on Tax Policies Relevant to Venture Capital Enterprises and Individual Angel Investors (document No. 55), once the investment of a venture capital fund that satisfies specific investment requirements in a high-tech enterprise that is in its seed stage or infant stage reaches two years, 70% of its investment may be deducted against taxable income by the venture capital firm or its investors. With the issuance of document No. 55, the scope of application of the above-mentioned tax break has expanded from pilot zones specified in the previous document, document No. 38, to the entire country. Document No. 55 expressly specifies that the term “venture capital firm” includes both “venture capital funds” recorded with the Asset Management Association of China (AMAC) and “venture capital enterprises” recorded with the National Development and Reform Commission (NDRC).

For a long time there has been a debate as to whether the 20% tax rate applies to individual limited partners of funds organized as limited partnerships. The State Administration of Taxation (SAT) has stated on multiple occasions that individual limited partners are required to calculate their individual income tax at a 5%-35% progressive tax rate. On 12 December 2018, a new tax calculation method for venture capital firms was proposed at an executive meeting of the State Council, pointing out that, on the basis of the tax breaks specified in document No. 55, beginning from 1 January 2019, venture capital firms that have carried out recordal in accordance with the law may opt to make the calculation as for a single investment fund, in which case the individual partners of that fund pay individual income tax on the equity transfer and dividend income derived from the fund at the rate of 20%. Alternatively, they make the calculation based on the entirety of the venture capital fund’s income for the year, in which case the individual partners calculate individual income tax on their income from the firm at a 5%-35% progressive tax rate.

Catherine Chen is a partner and Sha Yuedi is an associate at Zhong Lun Law Firm