July 07 2010
On April 30 2009 the State Administration of Taxation released a circular with retroactive effect to January 1 2008. It clarified that if venture capital investment enterprises make equity investments in private small and medium-sized high-tech and new technology enterprises for more than two years, they are entitled to deduct 70% of the total investment in the target enterprises from the venture capital enterprise's taxable income once the two-year period for the equity holding is reached. The deduction can be carried over to the following year if the amount exceeds the tax due in the current year.
This represents an undoubted benefit for venture capital investors. However, the benefit is subject to conditions. The investing enterprise's business scope must comply with the Interim Measures for the Administration of Venture Capital Investment Enterprises. Furthermore, the investment company must be registered as a professional corporate entity engaging in venture capital investment (eg, as a venture capital limited liability company or a venture capital company limited by shares).
The measures stipulate the required conditions and procedures for completing a filing, but the Ministry of Finance and the tax authorities may impose other conditions.
In essence, 70% of a venture capital investment enterprise's total investment can count towards its taxable income deduction. The provisions also facilitate the development of venture capital investment enterprises by simplifying the enforcement of the proposed tax preference generally set out in the interim measures. Foreign investors can also establish venture capital enterprises.
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