Home  Contact Us
  Follow Us On:
 
Search:
Advertising Advertising Free Newsletter Free E-Newsletter
Magazine
  
      2017       2016       2015       2014       2013       2012       2011       2010       2009       2008

FINANCE: Super Tax Incentives for Venture Capital Enterprises and Angel Investors
Share to

Super Tax Incentives for Venture Capital Enterprises and Angel Investors

By Kelvin Lee, PwC Tianjin

25 incentives 01
在上一期的封面人物中,我们为大家介绍了天使投资人马睿女士,通过她的故事,大家对天使投资人和投资行业也有了更深入的了解。投资与创投在近几年中国各行各业企业蓬勃发展的盛况中也成为了中国经济发展的一支重要力量。随着薛蛮子、李开复、雷军、周鸿祎、徐小平等知名人士转型做天使投资人,成功投资了一批初创企业并获得巨大回报后,天使投资的发展大大加快,政府也积极采取相关举措鼓励创投和天使投资人的发展。2017年4月19日,李克强总理主持召开国务院常务会议,推出了一揽子税收优惠举措。会议结束后不久,财政部和国家税务总局便联合其他政府部门密集出台了四份税收文件,迅速落实了会议中提出的各项税收优惠政策。


在这些政策中,最引人关注的当属财税38号文,根据该文件指示,在试点地区,创业投资企业以及天使投资人采取股权投资方式投资于初创科技型的,将有机会享受投资额抵扣企业或个人应纳税所得额的优惠。相比现行的创投企业税收优惠政策,这一新政将大大鼓励更多投资者积极参与创业投资中来,推动我国创新驱动战略的快速发展。政策受益方也会涵盖企业投资人和个人投资者。这一举措还将从税收角度激励更多资金进入创投行业,填补由于新生企业大量涌现造成的投资资本缺口,促进经济增长、增加就业机会。


In brief


BT 201707 FINANCE 01On 19th April, 2017, Premier Li Keqiang presided a State Council executive meeting (the Meeting) 1 where a package of tax incentives was announced in the light of the government work report for 2017. In response to this announcement, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) together with other government departments jointly and separately issued four tax policies 2 soon after the Meeting, including simplifying the Valued Added Tax (VAT) rate categories, increasing the percentage of Research and Development (R&D) expenses, super deduction for Corporate Income Tax (CIT) purpose for small and medium-sized technological enterprises, extending pilot Individual Income Tax (IIT) policy on commercial health insurance nationwide and offering tax incentives to venture capital enterprises (VCEs) as well as angel investors (AIs).


Among the four tax policies, Caishui [2017] No.38 (Circular 38) has attracted most attention. According to Circular 38, for equity investments in start-up technological enterprises made by the VCEs (including both corporate VCEs and limited partnership VCEs) and AIs in pilot areas, a certain percentage of the investment amount can be used to offset their taxable income. As compared to the current tax incentives for VCEs, this new policy is a significant breakthrough which would encourage more investors to be actively involved in the venture capital market and also promote the development of China's innovation-driven strategy.


In detail


Evolution of tax incentives for venture capital investment


Tax incentives to support VCEs originates from the new CIT Law which took effect in 2008 – it stipulates that where a VCE makes equity investment in a non-listed, small-to-medium-sized New/High Tech Enterprise (SMNHTE), 70% of the investment amount can be deducted from the taxable income of the VCE in the year after the investment has been held for 2 years. Any unutilized amount can be carried forward and deducted in the following years. Subsequently, Guoshuifa [2009] No.87 was issued to clarify that such favourable treatment is only applicable to corporate VCEs.
As more and more VCEs are established in form of limited partnership, MOF and SAT have issued a series of pilot policies since 2012 3, allowing corporate partners of limited partnership VCEs to also enjoy such CIT incentive in certain areas. From 1st October 2015, this incentive was rolled out nationwide.


Along with the growth of individual wealth and increasing individual demand of venture investment in China, the VC industry is in urgent need of relevant IIT incentive for support. As a result, Circular 38 was issued with two major breakthroughs based on prevailing CIT incentives, including: (1) allowing AIs and individual partners of limited partnership VCEs to enjoy similar IIT incentive; (2) allowing the same favourable treatment for investment in start-up technological enterprises with a relatively smaller scale.


Venture capital light bulb 编辑Policy beneficiaries: both corporate and individual investors


One of the major highlights of Circular 38 is to allow both corporate and individual investors to enjoy similar tax incentives. Further, whether an individual makes equity investment as a partner of a limited partnership VCE or as an AI, the IIT incentive would be available. The detailed policies are as follows:


- For VCEs, 70% of equity investment in start-up technological enterprises can be used to offset the taxable income of the corporate VCEs or the partners of limited partnership VCEs in the year after the investment has been held for 2 years. Any unutilized amount can be carried forward and deducted in the following years. Specifically, for corporate VCEs, the investment amount is deducted against taxable income of such corporate VCEs. As for limited partnership VCEs, the investment amount can be deducted from the income allocated to the corporate and individual partners by the partnership. It is important to note that such policy only applies to VCEs registered in the pilot areas 4.


- For AIs, 70% of equity investment in a start-up technological enterprise is allowed to be deducted from the taxable income derived from the equity transfer of that start-up technological enterprise after a 2-year holding period. If the taxable income is less than 70% of the investment, the unutilized portion can be carried forward to offset the taxable income from further equity transfer of such enterprise. Where a start-up technological enterprise is being deregistered and liquidated, any unutilized portion of deductible investment amount can be allowed to offset the taxable income derived from the transfer of other start-up technological enterprises invested by AIs within 36 months from the day of deregistration. It should be noted that eligible start-up technological enterprises invested by AIs should be registered in pilot areas.


Moreover, it is imperative to note that Circular 38 only applies to equity investment in cash and does not apply to investment through equity transfer from other shareholders of start-up technological enterprises.


Investment: start-up technological enterprises


Before the release of Circular 38, eligible investment for CIT incentive should be SMNHTE. In this regard, enterprises that cannot obtain the NHTE qualification due to certain reasons (e.g. the core technology does not fall within the technology area of the Catalogue of High and New Technology Areas Specifically Supported by the State) are relatively less attractive to the venture capital market from a tax perspective.


Circular 38 focuses on "start-up technological enterprises" in order to provide tax support to those enterprises dedicated to R&D activities at the seed stage or early stage. As reflected in the criteria for "start-up", an enterprise cannot be established for more than five years; and there are smaller number of employees, smaller amount of total assets and sales revenue requirements (e.g. pursuant to Circular 38 at the time of a start-up technological enterprise accepting the investment, the number of employees shall not be more than 200 and both the amount of total assets and annual sales revenue shall not be more than RMB 30 million; as compared with SMNHTE, the number of employees shall not be more than 500 and both the amount of total assets and annual sales revenue shall not be more than RMB 200 million). In terms of requirement of "technological", the R&D expenditures of the enterprise accepting the investment shall not be less than 20% of its total expenditure for the year of investment and the following year.


It is no doubt that Circular 38 will play a positive role in promoting the development of start-up technological enterprises without NHTE qualification but with a good prospect.

hl finance
The takeaway


During recent years, the Chinese government has been committed towards supporting start-up and innovation. It is expected that the release of Circular 38 will, from a tax perspective, motivate more capital flow into the venture capital market to fill up the capital need resulting from a large number of emerging start-ups and which will also promote economic growth and create more job opportunities. Considering the purpose of stimulating investment, investment amount which is allowed to be deducted from the taxable income is the actual paid-in capital amount and not the subscribed capital amount.


Meanwhile, corporate and individual investors who wish to enjoy the incentives stipulated in Circular 38 should note that eligible start-up technological enterprises refer to tax resident enterprises that file CIT on an actual basis and have not been listed domestically or abroad within two years from the acceptance of investment. When choosing an investment target, investors should pay attention to its financial compliance status and have a comprehensive consideration of the future exit plan. As for the start-up technological enterprises, they should enhance management and setting up relevant accounts to accurately identify and calculate R&D expenditures to meet the 20% prescribed ratio requirement in order to attract more premium investors.


Furthermore, since Circular 38 is only for pilot areas, it does not apply to overseas investments. According to Several Opinions of the State Council on Promoting the Sustainable and Healthy Development of Venture Capital Investment (Guofa [2016] No.53), VCEs are encouraged to "go abroad" and invest in overseas R&D projects. It is believed that overseas venture capital investment projects may also be eligible for tax incentives in future.


CIT incentives in Circular 38 took effect from 1st January 2017, while the IIT incentives shall take effect from 1st July 2017. For investors who had made investments within two years before the effective date and have held it for two years or more after the effective date, they may also be eligible for tax incentives in Circular 38. Meanwhile, Circular 38 also requires AIs, corporate VCs, corporate partners of limited partnership VCs and start-up technological enterprises to comply with the record-filing procedures. Currently, although most of the record filling can be performed in Golden Tax III system, it is not clear how to update the system and perform the record filing in line with this new Circular. It is believed that SAT will release a follow-up policy to further clarify the implementation of Circular 38 soon. We will closely monitor the development and accordingly share our observation at an appropriate time.


---END---

    Subscription    |     Advertising    |     Contact Us    |
Address: Magnetic Plaza, Building A4, 6th Floor, Binshui Xi Dao.
Nankai District. 300381 TIANJIN. PR CHINA
Tel: +86 22 23917700
E-mail: webmaster@businesstianjin.com
Copyright 2017 BusinessTianjin.com. All rights reserved.