In order to promote the sustainable and healthy development of venture capital investment, the Ministry of Finance and the State Administration of Taxation have jointly promulgated the Circular on Pilot Tax Policies for Venture Capital Firms and Individual Angel Investors (Cai Shui [2017] No. 38 ) (the “Circular“) on April 28, 2017. The tax policy will be trialed in the pilot area of Beijing-Tianjin-Hebei, Shanghai, Guangdong, Anhui, Sichuan, Wuhan, Xi’an, Shenyang, and Suzhou Industrial Park. Pilot areas include eight pilot areas for comprehensive innovation and reform, including the Beijing-Tianjin-Hebei region, Shanghai, Guangdong, Anhui, Sichuan, Wuhan, Xi’an and Shenyang and Suzhou Industrial Park.

The pilot tax policies set forth in the Circular include:

  1. For venture capital firm in corporate nature who has made direct equity investment (meaning in the way of capital increase, hereinafter the same) in a tech firm in seed stage or early stage (“tech startup”) for at least two full years (24 months, hereafter the same), it may deduct 70% of the investment amount[1] from its taxable income in the second full year of holding equity shares of the tech startup, and such deduction may be carried forward to the following years if its taxable income is not enough for deduction.
  2. For limited partnership venture capital investment enterprise who has made direct equity investment in a tech startup for at least two full years, both its corporate partner and individual partner may deduct 70% of their investment amount from the respective income (for corporate partner) and business income (for individual partner) distributed from such partnership enterprise and such deduction may be carried forward to the following year if the income is not enough for deduction;
  3. For an individual angel investor who has made direct equity investment in a tech startup for at least two full years, the individual is allowed to deduct 70% of his/her investment amount from the taxable income derived from transfer of the equity shares in the tech startup, and such deduction may be carried forward to the future when obtaining the taxable income from his/her transfer of such tech startup’s equity shares.

In the case of an individual angel investor making several tech startup investments in the pilot areas, and when 70% of his/her investment amount in a tech startup under deregistration and liquidation process cannot be fully deducted, the remaining amount may be deducted from the taxable income derived from his/her transfer of other tech startups within 36 months from the deregistration/liquidation date of the said tech startup.

In the case of a tech startup who has accepted individual angel investor’s investment for at least two full years becomes a listing company at the Shanghai Stock Exchange or Shenzhen Stock Exchange, the individual investor shall follow the current stipulations regarding restricted shares to sell his/her stocks of the tech startup and his/her remaining investment amount to be deducted can be calculated and deducted from his/her tax payable for such stocks sales.

The Circular also gives the following qualification requirements on the tech startups, VC investment enterprises and individual angel investors:

  1. For Tech Startups:
    1. Subject to audit collection and registered in China mainland;
    2. At the time of accepting investment, the number of employees (including dispatched labors) shall be no more than 200[2], among which there shall be no less than 30% of employees having bachelor’s degree or higher; each of the total assets and the annual sales revenue shall be no more than CNY30 Million Yuan;
    3. In the year of investment acceptance and the next tax year, the total costs[3] for R&D shall be no less than 20% of the cost expenditure.
    4. Shares have not been listed in stock exchanges at home and abroad on and within two years of acceptance of investment;
    5. At the time of accepting investment, it shall be established for no more than five years (60 months);
  2. For Venture Capital Investment Enterprises
    1. Subject to audit collection and registered in the pilot area stipulated in the Circular, and not being the initiator of the tech startups;
    2. Has completed filing with the National Development and Reform Commission or Asset Management Association of China under China Securities Regulatory Commission
    3. The total equity held by the VC investment enterprise and its affiliates in the tech startup within two years after its investment shall be less than 50%.
  3. Individual Angel Investor
    1. Not the initiator, employee or their relative (including spouse, parents, children, grandparents, maternal grandparents, grandchildren, maternal grandchildren, siblings, the same below) of the invested tech startup; no labor dispatch relation with the tech startup;
    2. The total equity held by the individual angel investor and his/her relatives in the tech startup within two years after his/her investment shall be less than 50%;
    3. The tech startup invested by the individual angel investment investor shall be registered in the pilot area stipulated in the Circular.