State Council to refine tax incentives for venture capital firms

China will introduce more income tax incentives to drive entrepreneurship and innovation, the State Council executive meeting chaired by Premier Li Keqiang decided on Dec 12.

President Xi Jinping pointed out that innovation is the primary driving force behind development and is the strategic underpinning for building a modernized economy. It is of great significance to cultivate and protect the entrepreneurial spirit, enhance support for small and medium-sized enterprises, and reduce the tax and fee burdens on businesses.

At the State Council’s executive meeting on Sept 6, Premier Li Keqiang made clear the requirement to keep the local preferential tax policies for venture capital funds stable to see that there will be no increase in their overall tax level. He also urged competent authorities to work out more tax incentives in support of the further development of venture capital funds.

“Our economic growth is faced with yet another round of downward pressure. The number of college graduates keeps hitting new records, and we still face considerable pressure on employment,” Premier Li said, “Business start-ups not only add jobs, but also help boost innovation. There is still tremendous potential in this respect.”

The government already introduced such tax relief for VC firms under which their taxable income is deducted by an equivalent of 70 percent of their investment in seed or early-stage hi-tech startups. To further incentivize VC investment, stimulate more factors of production by market forces, enhance the efficacy of entrepreneurial activities and innovation, and propel the commercialization of R&D deliverables and industrial upgrading, the meeting on Dec 12 decided on additional tax incentives.

Starting from Jan 1, 2019, for properly filed VC firms that choose to have their taxes calculated as single investment funds, their individual partners shall pay personal income taxes on their earnings from transfer of shares and stock dividends at 20 percent; for properly filed VC firms who choose to have their taxes calculated based on the firms’ annual incomes, their individual partners shall pay personal income taxes on their earnings in the firms at progressive tax rates from 5 percent to 35 percent. This policy will be effective for five years.

“VC funds have grown quite considerably in scale, and now play a big role in catalyzing investment. The personal income tax incentives for VC firms are important for developing and nurturing the capital market. Such incentives need to be further improved and better implemented to ensure that the tax burdens of individual partners of VC firms will be reduced rather than increased.” Premier Li said.

Recent years have seen intensified efforts in delivering tax incentives to VC firms. This year, the corporate income tax brackets were further expanded, and the threshold of annual taxable income for the highest marginal tax rate of 35 percent was raised from 100,000 yuan to 500,000 yuan.

“It is critical to send positive signals to the market when implementing these tax policies to help VC funds grow. This will foster an enabling environment for businesses to develop. Every bit of effort counts,” Premier Li said.