Circular on Policy Issues Concerning Income Tax on Individual Partners of Venture Capital Firms

(Issued by the Ministry of Finance, the State Administration of Taxation, the National Development and Reform Commission and the China Securities Regulatory Commission on January 10, 2019 and effective as of January 1, 2019 until December 31, 2023.)

Cai Shui [2019] No.8

Finance departments (bureaus), development and reform commissions, securities regulators and offices of the State Administration of Taxation of the provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans, and the Finance Bureau and the Development and Reform Commission of the Xinjiang Production and Construction Corps:

With a view to further supporting the development of venture capital firms (including venture capital funds; hereinafter collectively referred to as “VCF”), we hereby notify you of relevant individual income tax policy issues as follows:

1 . A VCF, when calculating the individual income tax payable by its individual partners on their income sourced from the firm, may do so either on a single investment fund basis or on the basis of the entire income of the firm for the year.

For the purposes of this Circular, the term “VCF” means a venture capital firm (fund) organized as a partnership that complies with relevant provisions of the Tentative Measures for the Administration of Venture Capital Firms (Order of the NDRC and nine other departments No.39) or the Tentative Measures for the Regulation of Private Investment Funds (Order of the CSRC No.105) on venture capital firms (funds) and has completed record filing and operates compliantly in accordance with the aforementioned provisions.

2 . Where a VCF elects to effect calculation on a single investment fund basis, its individual partners shall calculate and pay individual income tax on the distributable equity transfer income and dividend income derived from the fund in question at a tax rate of 20%.

Where a VCF elects to effect calculation on the basis of its entire income for the year, its individual partners shall calculate and pay individual income tax on the income derived from the VCF as for “business income” at a progressive tax rate of 5-35%.

3 . The phrase “calculation on a single investment fund basis” means the calculation and payment of tax by a single investment fund (including a VCF established without using the word “fund” in its name) by the methods respectively set forth below on the equity transfer income and dividend income derived from different venture capital projects during one tax year:

(1) Equity transfer income: the equity transfer income derived from a single investment project is calculated based on the balance remaining after subtracting the original value of the equity and the reasonable expenses incurred at the transfer stage from the equity transfer income for the year (the method of determining the original value of the equity and the reasonable expenses incurred at the transfer stage is handled with reference to relevant policies on individual income tax on equity transfer income); the equity transfer income of a single investment fund is calculated based on the balance remaining after deducting the losses from the income from the different investment projects during one tax year, and if the balance is greater than or equal to zero, the same is confirmed as the equity transfer income of the fund for the year; if the balance is less than zero, the fund's equity transfer income for the year is counted as zero and may not be carried forward to successive years.

An individual partner shall calculate the tax payable by him/her based on the share of the equity transfer income of the fund for the year distributable to him/her, and the VCF shall withhold such individual income tax before March 31 of the following year. If the conditions set forth in the Ministry of Finance and State Administration of Taxation, Circular on Tax Polices Relevant to Venture Capital Firms and Individual Angel Investors (Cai Shui [2018] No.55) are satisfied, an individual partner of a VCF may calculate the tax payable by him/her after deducting 70% of the investment in the transferred project from the share of the equity transfer income of the fund for the year distributable to him/her, and if the amount cannot be fully deducted for the period in question, the remainder may not be carried forward to successive years.

(2) Dividend income: the dividend income derived from a single investment fund is calculated based on all of the dividend and extra dividend income and other fixed-return securities income sourced from the invested projects.

An individual partner shall calculate the tax payable by him/her based on his/her share of the dividend income of the fund distributable to him/her, and the VCF shall withhold individual income tax each time such dividends are distributed.

(3) Other than the aforementioned deductible costs and expenses, other expenditures incurred by a single investment fund such as the management fee and performance remuneration paid to the investment fund manager may not be deducted at the time of calculation.

The calculation methods for single investment funds specified in this Article apply solely to the calculation of the tax payable by individual partners of VCFs.

4 . The phrase “calculation on the basis of the entire income of a VCF for the year” means calculation of the income distributable to the individual partners after the deduction of costs, expenses and losses from the gross revenue of the VCF each tax year. If the conditions set forth in the Ministry of Finance and State Administration of Taxation, Circular on Tax Polices Relevant to Venture Capital Firms and Individual Angel Investors (Cai Shui [2018] No.55) are satisfied, an individual partner of a VCF may calculate the tax payable by him/her after deducting 70% of the investment in the transferred project from the business income of the VCF distributable to him/her. If the calculation for the year produces a deficit, the same may be carried forward to subsequent years in accordance with relevant provisions.

If an individual partner on whom tax is levied under the “business income” item does not have integrated income, he/she may deduct basic deductible expenses, special deductions, special expense deductions and other deductions determined by the State Council. Where an individual partner derives business income from multiple sources, he/she shall calculate all of his/her individual income tax together, and may deduct the aforementioned expenses and deductions only once.

5 . Once a VCF opts for calculation on a single investment fund basis or on the basis of the entire income of the firm for the year, it may not change the same for three years.

6 . Where a VCF opts for calculation on a single investment fund basis, it shall, within 30 days of completing record filing in accordance with Article 1 hereof, carry out record filing of its calculation method with the competent tax authority. If it fails to carry out record filing, it shall be deemed to have opted for calculation on the basis of the entire income of the firm for the year. Where a VCF has completed record filing before January 1, 2019 and wishes to opt for calculation on a single investment fund basis, it shall carry out record filing of its calculation method with the competent tax authority by March 1, 2019. If a VCF wishes to revise its calculation method after the lapse of three years, it shall carry out record filing anew with the competent tax authority by January 31 of the year immediately following the year in which the three-year period lapsed.

7 . When a tax authority carries out tax levy administration and follow-up administration work in accordance with the law, it may request that the development and reform department and/or the securities regulator verify whether a VCF and the projects in which it has invested comply with relevant provisions, and the development and reform department and the securities regulator shall offer their cooperation.

8 . This Circular shall be effective as of January 1, 2019 until December 31, 2023.