Circular on Issues Concerning the Implementation of Preferential Income Tax Treatment for Venture Investment Enterprises

(Issued by the State Administration of Taxation on April 30 2009 and effective as of January 1 2008.)

Guo Shui Fa [2009] No.87

Offices of the State Administration of Taxation and local taxation bureaux of provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans:

With a view to implementing the preferential income tax policy on venture investment enterprises and promoting the development of venture investment enterprises, we hereby notify you on issues relevant to preferential income tax treatment for venture investment enterprises pursuant to relevant provisions such as the PRC Enterprise Income Tax Law , its implementing regulations, etc. as follows:

1. The term “venture investment enterprise” means an enterprise or other economic organisation dedicated to venture investment activities and established in the People's Republic of China pursuant to the Tentative Measures for the Administration of Venture Investment Enterprises (Order of the National Development and Reform Commission and nine other ministries and commissions No.39 of 2005; the Tentative Measures) and the Provisions for the Administration of Foreign-invested Venture Investment Enterprises (Order of the Ministry of Commerce and four other ministries and commissions No.2 of 2003).

2. If a venture investment enterprise invests in an unlisted small or medium high and new technology enterprise in the form of an equity investment for at least two years (24 months) and satisfies the conditions set forth below, it may deduct 70% of its investment in the small or medium high and new technology enterprise from its own taxable income in the year that it holds the equity for two full years; if the same cannot be deducted fully in the year in question, it may be carried forward and deducted in subsequent tax years:

(1) its scope of business complies with the Tentative Measures and it is registered with the administration for industry and commerce as a “venture investment limited liability company”, “venture investment company limited by shares” or other such professional venture investment enterprise with legal personality;

(2) it has completed record filing on the conditions and by the procedure specified in the Tentative Measures, has passed the annual inspection by the record filing authority and its investment operation complies with relevant provisions of the Tentative Measures;

(3) the small or medium high and new technology enterprise invested in by the venture investment enterprise shall, in addition to having been recognised as a high and new technology enterprise in accordance with the Ministry of Science and Technology, Ministry of Finance and State Administration of Taxation, Circular on the Issuance of the Measures for the Administration of the Recognition of High and New Technology Enterprises (Guo Ke Fa Huo [2008] No.172) and the Circular on the Issuance of the Guidelines for the Administration of the Recognition of High and New Technology Enterprises (Guo Ke Fa Huo [2008] No.362), satisfy conditions such as having a workforce of not more than 500 persons, annual sales (business) turnover of not more than Rmb200 million and total assets of not more than Rmb200 million;

if a small or medium high and new technology enterprise secured its qualifications as a high and new technology enterprise before the end of 2007 in accordance with the previous provisions and continued to satisfy the new criteria for a high and new technology enterprise in 2008, the calculation of the 24-month investment period may commence from the date on which the venture investment enterprise actually made the investment therein; and

(4) other conditions as specified by the Ministry of Finance and the State Administration of Taxation.

3. If a small or medium high and new technology enterprise is recognised as satisfying the criteria for a high and new technology enterprise after receiving a venture investment, the investment period of the venture investment enterprise shall commence to be counted from the year in which the small or medium high and new technology enterprise is recognised as a high and new technology enterprise. If, during that period and after the small or medium high and new technology enterprise has accepted the venture investment, its size exceeds the criteria for a small and medium enterprise but it continues to satisfy the criteria for a high and new technology enterprise, the relevant preferential tax treatment enjoyed by the venture investment enterprise shall not be affected.

4. When the venture investment enterprise is to apply for deduction of its investment from its taxable income, it shall submit the following documentation to the competent tax authority for the record before filing its tax returns for the year in which it applies for deduction of its investment from its taxable income:

(1) (a duplicate of) the notice of passing the annual inspection issued by the record filing authority;

(2) an account of the investment operation of the venture investment enterprise;

(3) a photocopy of the investment contract for, or articles of association of, the small or medium high and new technology enterprise, a capital verification report for the funds actually invested and other such relevant materials;

(4) an account of the basic particulars of the small or medium enterprise (including its total workforce, annual sales (business) turnover, total assets, etc.); and

(5) (a photocopy of) the valid high and new technology enterprise certificate of the small or medium high and new technology enterprise issued by the administrative authority for the recognition of high and new technology enterprises of the province, autonomous region, municipality directly under the central government or city with independent development plans.

5. This Circular shall be effective as of January 1 2008.