New Tax Incentives to Help China's Venture Capitalists
Liao Shumin
DATE:  Dec 14 2018
/ SOURCE:  yicai
New Tax Incentives to Help China's Venture Capitalists New Tax Incentives to Help China's Venture Capitalists

(Yicai Global) Dec. 13 -- Individual partners at venture capital firms may choose to pay personal income tax on gains from share transfers and dividends at a preferential rate of 20 percent from next year, instead of the 35 percent required by some regions, the State Council announced. 

The cabinet's move, which was unveiled after a meeting yesterday, is aimed at further encouraging entrepreneurship and innovation in China.

Local governments may choose to assess a lawfully filed venture capital firm as a single investment fund from Jan. 1, based on the document released after the meeting, which said that individual partners may pay personal income tax at a preferential rate of 20 percent on income from share transfers and dividends.

The governments may also choose to measure incomes based on VC firms' annual earnings, with the personal income tax collected at a progressive rate of between 5 percent and 35 percent. The term of the policy is tentatively set at five years.

The document emphasized that the policy aims to reduce the tax burden on individual partners in VC firms. The policy will also provide some relief for investors.

Many local governments were collecting income tax on share transfers and dividends earned by individual partners at a rate of 20 percent before September this year. The State Administration of Taxation in September called the move illegal, urging local governments to collect the tax at a rate of 35 percent.

More seriously, the SAT said VC firms should make a supplementary payment to the taxes already collected over the years based on the new standard, which meant that some better-performing VC companies with a larger amount of investment withdrawn by limited partners over the past several years would need to pay additional taxes of up to hundreds of millions of Chinese yuan.

Experts also point out that yesterday's cabinet meeting mentioned that authorities may choose to measure a lawfully filed venture capital firm as a single investment "fund" and individual partners may pay personal income tax at a preferential rate of 20 percent. The government makes it clear that the fund income refers to dividend, bonus and project transfer earnings, rather than operating income by listing "fund" as the measuring unit, rather than taxing each project.

The VC sector's fate is closely linked to China's real economy due to its unique characteristics, Cornerstone Capital Vice President Ceng Saiyin told Yicai Global. 

Ceng added that advancing the development of the VC sector will play an obvious role in promoting innovation and entrepreneurship in China and effectively solve the financing difficulties of Chinese small- and medium-sized companies.

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Keywords:   Venture Capital Fund,Income Tax Rate