TAX NEWS - June 2010

China Tax: Circular on the issues regarding the implementation of preferential income tax for venture capital investment enterprises

On April 30, 2009, the State Administration of Taxation ("SAT") released the Circular, retroactively effective on January 1, 2008.   

The Circular clarifies that if venture capital investment enterprises ("VC Enterprises") (i) invest in private small and medium-sized high-tech and new technology enterprisesfor more than 2 years (24 months) through equity investment, and (ii) meet the following conditions, such VC Enterprises are entitled to 70% deduction of the total investment in the small and medium-sized high and new technology enterprises from the VC Enterprises taxable income upon fulfilling a two-year period of equity holding; the tax deduction can be carried over to the following year if the tax deduction amount exceeds the tax payment amount in the current year.

(a) The business scope is in compliace with the Interim Measure for the Administration of Venture Capital Investment Enterprises ("Interim Measure"), and is registered as a professional corporate entity engaging in venture capital investment, such as "venture capital limited liability company" or "venture capital company limited by shares".

(b) The filing is completed according to the required conditions and procedures stipulated by the Interim Measure.

(c) Venture capital investment enterprises must invest in the high-tech and new technology enterprises.

(d) Other conditions required by the Ministry of Finance and State Administration of Taxation (SAT).

KW Comments: In essence, SAT clarified the tax holiday of enterprise income tax for a venture capital investment enterprise.As such, 70% of the total investment of a venture capital investment enterprise can be applied toward its taxable income deduction. State Administration of Taxation also facilitated the development of venture capital investment enterprises by simplifying the enforcement of the proposed tax preference generally provided in Interim Measure, According to the Provisions Concerning the Administration of Foreign-funded Venture Capital Investment Enterprises, the foreign investors can also establish the VC Enterprises.