Would a private equity fund vehicle formed in your jurisdiction be subject to taxation there with respect to its income or gains? Would the fund be required to withhold taxes with respect to distributions to investors? Please describe what conditions, if any, apply to a private equity fund to qualify for applicable tax exemptions.
Private equity fund vehicles formed in the PRC are subject to different tax treatment based on their legal form with respect to income and gains. Private equity funds formed as companies pay enterprise income taxes on income, while private equity funds formed as partnerships or contractual funds are not subject to income tax obligations at the fund level.
With respect to withholding obligations, corporations are legally obligated to withhold taxes for individual investors. Partnerships in practice are also usually required by the authorities to withhold taxes for individual investors. For now, contractual funds are generally considered not liable to withhold taxes.
As described above, private equity fund vehicles in the form of partnerships and contractual funds are not themselves subject to income taxes and thus there is no need to apply for a tax exemption. Private equity fund vehicles in the form of companies are required to pay enterprise income taxes and are not eligible for a tax exemption. However, income that qualifies as tax-exempted income under the PRC Enterprise Tax Taw can be deducted from the taxable income of such companies. For example, income from interest on government bonds and equity investment income such as dividends between qualified resident enterprises are considered tax-exempt income.Local taxation of non-resident investors
Would non-resident investors in a private equity fund be subject to taxation or return-filing requirements in your jurisdiction?
Non-resident enterprises are subject to withholding of income taxes at a rate of 10 per cent on PRC-source income from private equity funds if the income is not connected with a permanent establishment in the PRC. Otherwise, the non-resident enterprises may be subject to a tax rate of 25 per cent for its taxable income (tax incentive policies and exemptions apply in some cases). For non-resident investors of private equity funds organised as LLPs, taxation remains unclear and local tax authorities may apply different withholding tax rates in practice.
Non-resident individuals are subject to income tax exclusively on their PRC-source income. Private equity funds in the PRC are mostly organised as LLPs, which are tax flow-through vehicles, and non-resident individuals in LLP private equity funds will be subject to taxation on distributions at rates similar to those of resident individuals.Local tax authority ruling
Is it necessary or desirable to obtain a ruling from local tax authorities with respect to the tax treatment of a private equity fund vehicle formed in your jurisdiction? Are there any special tax rules relating to investors that are residents of your jurisdiction?
The PRC has not generated a uniform special tax treatment for the private equity fund industry at the national level, except that individual investors in a venture capital fund that chooses accounting based on a single investment fund can enjoy a preferential income tax rate of 20 per cent on equity transfer income and income from bonuses and dividends. Considering that by now there still remains uncertainty regarding tax treatment of private equity fund vehicles, especially in the form of LLPs, obtaining a confirmation of taxation ruling in respect of such funds from the local tax authorities could be useful in dispelling such uncertainty.Organisational taxes
Must any significant organisational taxes be paid with respect to private equity funds organised in your jurisdiction?
There are no organisational taxes in the PRC with respect to private equity funds.Special tax considerations
Please describe briefly what special tax considerations, if any, apply with respect to a private equity fund’s sponsor.
Private equity fund sponsors, when making tax considerations, usually take into account the following questions:
- which legal form of private equity investment vehicle to use in order to minimise overall tax liability;
- where to form such private equity investment vehicle to enjoy more favourable local tax treatment; and
- how to structure the carry vehicle and the management entity to ensure that carried interest and management fees will be subject to the lowest tax rate.
For the above taxation questions, most answers change from time to time along with changes in tax policies at either the national or local level, especially tax treatment for individual investors.Tax treaties
Please list any relevant tax treaties to which your jurisdiction is a party and how such treaties apply to the fund vehicle.
As of 1 October 2018, the PRC has had double taxation agreements with Hong Kong SAR and Macao SAR in effect, and has double taxation treaties under the OECD guidelines in effect with Albania, Algeria, Armenia, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Barbados, Belarus, Belgium, Bosnia and Herzegovina, Brazil, Brunei, Bulgaria, Cambodia, Canada, Chile, Croatia, Cuba, Cyprus, Czech Republic, Czechoslovakia, Denmark, Ecuador, Egypt, Estonia, Ethiopia, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Laos, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mauritius, Mexico, Moldova, Mongolia, Montenegro, Morocco, Nepal, Netherlands, New Zealand, Nigeria, Norway, Oman, Pakistan, Papua New Guinea, the Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, the Seychelles, Singapore, Slovenia, South Africa, Spain, Sri Lanka, Sudan, Sweden, Switzerland, Syria, Tajikistan, Thailand, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Ukraine, the United Arab Emirates, the United Kingdom, the United States, Uzbekistan, Venezuela, Vietnam, Zambia and Zimbabwe. The PRC has entered into double taxation treaties with Angola, Botswana, Gabon, Kenya, the Republic of the Congo and Uganda that are not yet effective. Exemptions or reductions in PRC taxes may be offered under these tax agreements or treaties for non-resident investors of the PRC private equity funds, if applicable.
The PRC has signed tax information exchange agreements with Argentina, the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Liechtenstein and San Marino. The PRC has also signed a multilateral competent authority agreements to implement the OECD Standard for Automatic Exchange of Financial Account Information (ie, the Common Reporting Standard (CRS)). Private equity funds are required to comply with registration, due diligence and reporting requirements related to the CRS.Other significant tax issues
Are there any other significant tax issues relating to private equity funds organised in your jurisdiction?
Venture capital funds enjoy certain special preferential tax treatments. To register as a venture capital fund, the fund generally needs to meet certain investment strategy criteria, limited duration and other compliance or registration requirements.
To be specific, where venture capital funds hold investments in qualified small to medium-sized companies with high-tech qualification certificates for a period of at least two years, corporate venture capital funds and corporate partners in LLP venture capital funds are permitted to apply 70 per cent of their total investment amount in such qualified companies to offset their taxable income, with any excess carried forward to subsequent years.
High-tech qualification certificates are, however, not easy to obtain in practice. Therefore, venture capital funds are further entitled to similar preferential tax treatments for investments in technology-orientated enterprises at the seed or early stages. This tax incentive, piloted in 2017 and rolled out nationwide in 2018, is notable especially for individual income tax incentives for individual partners of venture capital funds formed as LLPs. For individual partners, 70 per cent of the equity investment in such qualified investments can be deducted from the related taxable income obtained from such venture capital funds, with any excess carried forward to subsequent years.