Investors looking for opportunities in China may wish to take advantage of the new incentives.

Shanghai has long had an ambition to rebuild itself as an international commercial and financial center in Asia. In a bid to attract more private equity (PE) and venture capital (VC) funds and foreign-invested regional headquarters to Shanghai, the Shanghai Municipal Government recently announced two implementation rules to enforce various incentive policies for PE/VC companies established in the Pudong District of Shanghai and for foreign-invested regional headquarters established in or relocated to Shanghai.

Incentive Policy for PE/VC funds Established in Pudong

In early March 2009, at a seminar on the implementation policies for PE and VC investment enterprises held by the Pudong New District Government, the Financial Service Office of the Pudong New District Government introduced the latest policy to encourage the establishment of PE/VC investment companies in Pudong—the Implementation Measures for the Promotion of the Development of PE/VC Investment and Management Enterprises in Pudong New District (New Measures).

According to the New Measures, PE/VC investment enterprises in the form of limited liability companies established in Pudong New District since 1 January 2008 that have paid-up registered capital of RMB500 million or more will be granted a lump sum bonus of RMB5 million. This bonus may be increased along with the increase of the paid-in registered capital. If the paid-in registered capital reaches RMB3 billion, the bonus may be increased to be RMB15 million.

For partnership PE/VC investment enterprises set up in Pudong since 1 January 2008, a lump sum bonus of RMB5 million may be granted if actually raised funds reach RMB1 billion, which may be increased to RMB15 million if actually raised funds hit RMB5 billion.

Additional individual taxation rebates up to 40 per cent of the paid tax will be granted to the top management of PE/VC companies, and an allowance equivalent to 20 per cent of the paid individual tax will be provided to the other senior management of these companies. After meeting certain special conditions, the senior management may also be entitled to a housing allowance of up to RMB200,000 per person.

The New Measures further provide that if PE/VC companies invest in certain industries highlighted by the Pudong New District government, half of the financial revenues generated from such investments and allocated to the Pudong District Government will be granted to PE/VC companies as an additional bonus.

Incentive Policy for Foreign-Invested Regional Headquarters in Shanghai

In 2008, the Shanghai Municipal Government promulgated certain policies to encourage multinational companies to establish their regional headquarters (RHQ) in Shanghai. According to such incentive policies, foreign-invested RHQ that are newly established in or relocated to Shanghai will be provided with various incentives, such as cash allowances and awards, financing management support, simplified entry-exit formalities for working staff and fast customs clearance.

According to these incentive policies, foreign-funded investment companies approved by the Ministry of Commerce and foreign-funded management companies approved by the Shanghai Municipal Government may apply to the Shanghai Municipal Government for certification as RHQ. While foreign-funded investment companies will be automatically certified as RHQ upon application, foreign-funded management companies must meet the following certification conditions:

  • The total assets of the foreign parent company are not less than US$400 million.
  • The foreign parent company has injected more than US$10 million as registered capital for its affiliates in China, and there are more than three affiliates in China or more than six affiliates that will be managed by the management company.
  • The registered capital of the management company is not less than US$2 million.

To implement the incentives of cash allowances and awards for the RHQ, the Shanghai Municipal Government has recently issued the Interim Measures on the Usage and Management of the Special Development Fund for Encouraging the Regional Headquarters Established by Multinational Companies in Shanghai.

According to these implementation rules, the following cash allowance and awards are available to eligible RHQ.

Startup Allowance

An RHQ established in the form of an investment company that is newly registered in or relocated to Shanghai will be given a start-up allowance of RMB5 million (US$731,000) to be paid in installments over three years, i.e., 40 per cent for the first year starting from the incorporation, and 30 per cent for the second and third years respectively.

Rent Allowance

An RHQ newly registered in or relocated to Shanghai that rents an office for its own use will be given a rent allowance for three years with an annual allowance calculated at the rate of 30 per cent of RMB8 per square metre per day, up to 1,000 square metres. If it builds or purchases its own office, it will be granted a lump sum allowance equal to the total amount of the above three-year annual allowance.

Performance-Based Awards

An RHQ incorporated in the form of an investment company in Shanghai that has been certified by the Ministry of Commerce as a state-level RHQ will be given a reward amounting to RMB10 million, provided that its annual business revenue exceeds RMB1 billion for the first time after its certification as an RHQ. An RHQ incorporated in the form of a management company in Shanghai will be given a reward of RMB5 million, provided that its annual business revenue exceeds RMB500 million for the first time after its certification as the RHQ. These awards will be paid over three years at the rate of 40 per cent, 30 per cent and 30 per cent, respectively.

Additionally, the implementation rules also set forth detailed procedures for granting the cash incentives, including the listing of requested application documents and the processing of approvals by relevant governmental authorities.

Conclusions

The incentive policies described in this article are good news for foreign investors who have been watching China for potential investment opportunities, as their new investment in China may be structured to take advantage of these incentives. For multinational companies with existing heavy investments in China, now could be a good time to restructure and consolidate existing business operations to take advantage of the policies. However, because the above policies are brand new, good communication and specific consultation with the relevant government departments in Shanghai will be necessary to secure such extensive incentives.