In the first half of 2017 China rolled out a range of new tax reduction measures to facilitate the development of the Chinese economy. In particular, Premier Li Keqiang set out, in the April 2017 Report on the Work of the Government to the State Council, plans for VAT rate bracket consolidation, enhanced research and development (R&D) expense super deductions for certain small and medium enterprises, personal income tax deductions for private health insurance, and new venture capital (VC) tax incentives.
Focusing on the latter, effective from 1 January 2017 a new tax incentive is provided to VC enterprises investing in science and technology enterprises at seed capital or start-up stage. The incentive had already been flagged as early as September 2016 in State Council Circular 53. The details are provided in Circular 38, issued by MOF and SAT on 28 April 2017.
Under the incentive, 70% of the investment amount can be offset against the taxable income of the VC enterprise for Corporate Income Tax (CIT) purposes. Furthermore, from 1 July 2017 equivalent Individual Income Tax (IIT) treatment will be provided for individuals investing through VC partnerships, as well as in an individual capacity as ‘business angels’. The new rules will initially be piloted in eight designated locations, including Beijing-Tianjin-Hebei, Shanghai, Guangdong, Anhui, Sichuan, Wuhan, Xian, Shenyang, as well as Suzhou Industrial Park. The details of the incentives are set out in this Alert.