China Clarifies Tax Policies for Venture Capital Enterprises in Suzhou Industrial Park
Jun. 5 – China’s State Administration of Taxation released the “Announcement on Administration Regarding Corporate Income Tax Collection of Legal Partners from Limited Partnership Venture Capital Enterprises in Suzhou Industrial Park (Announcement  No.25, hereinafter referred to as the ‘Announcement’)” on May 24, which is retroactively effective from January 1, 2012. Detailed information can be found below.
According to the Announcement, with respect to any limited partnership venture capital enterprise (hereinafter referred to as an ‘Enterprise’) established in the Suzhou Industrial Park based on the Partnership Laws of the People’s Republic of China and the Interim Administrative Measures of Venture Capital Enterprises, and engaged solely in capital investment activities, if they have invested in any unlisted small or medium-sized high-tech enterprises by way of equity investment for two years (24 months) within the pilot period, their legal partners are entitled to preferential tax policies.
Preferential Tax Policy
The Announcement provides that 70 percent of the investment amount by the above-mentioned legal partners in a small or medium-sized high-tech enterprise can be deducted from their taxable income distributed from the Enterprise.
Where the legal partner has invested in several qualified Enterprises in the Suzhou Industrial Park, its deductible investment amount and taxable income can be calculated on a consolidated basis, and if the investment amount is insufficient to offset the taxable income, the excess may be carried forward to future tax years for deduction.
Determination of Investment Amount
The investment amount by a legal partner in a small or medium-sized high-tech enterprise shall be determined based on the following two factors:
- The amount invested by the Enterprise in a small or medium-sized high-tech enterprise.
- The respective capital contribution of each legal partner in the Enterprise as prescribed in the partnership agreement.
Determination of Taxable Income Distribution
The taxable income of legal partners distributed from an Enterprise shall be determined according to the following principles:
- Partners of a partnership enterprise shall, based on the partnership enterprise’s production and operation income and other incomes, determine the taxable income according to the distribution proportion as agreed upon in the partnership agreement.
- In the case of a failure to stipulate or failure to explicitly stipulate the distribution proportion in the partnership agreement, the taxable income shall be determined according to the distribution proportion as agreed upon by the partners through negotiation based on the enterprise’s entire production and business operation income and other incomes.
- In the case of a failure to reach an agreement through negotiation, the taxable income shall be determined according to the proportion of capital contribution actually paid by the partners.
- In the event of a failure to determine the proportion of capital contributions, the taxable income shall be averagely-distributed among the partners based on the partnership enterprise’s entire production and business operation income and other incomes.
The Enterprise shall, within three months after the end of the year, submit relevant tax declaration materials to the competent tax authorities within the Suzhou Industrial Park.
The legal partner shall submit the following materials to the local competent tax authorities when applying for the deductible taxable income:
- Written notice on Annual Inspection Attainment (photocopy) issued by the record-filing administrative department upon verification
- Written explanation on the operation situation of the Enterprise
- Photocopies of investment contracts or articles of association of the small or medium-sized high-tech enterprise
- Capital verification report on the actual-invested fund of the small or medium-sized high-tech enterprise
- Written explanation on the basic information of the small or medium-sized high-tech enterprise
- Certificate of High-New Tech Enterprises (photocopy) for small or medium-sized high-tech enterprises issued by relevant administrative organizations
- Capital verification report of the Enterprise
- List on the deductible taxable income of legal partners of the Enterprise, with chop from the competent tax authorities of Suzhou Industrial Park
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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