Authorities ' equity and venture capital tax policy

Balance the tax burden and prevent the "black stone tax Case" from being staged in Chinese version

As early as 2007, the state Finance and Taxation Department for the company-type venture capital fund, issued the "on the promotion of venture capital enterprises to develop relevant tax policy notice" (tax [2007]31 number, referred to as "31st text"). 2009, the State administration of taxation on the basis of 31st, promulgated the "on the implementation of venture capital enterprise income tax concessions" (national tax issued [2009]87 number, abbreviation 87th). 87th the implementation of a year, what is the effect of this? How to improve in the future? Although the United States in the outbreak of "black stone tax case" after the start of the brewing of a fundamental reform of the partnership tax system, but many of our local governments in partnership-type equity investment funds issued a tax preferential policies. What are the prospects for the implementation of these policies? In order to help the industry to understand the background and essence of tax policy at home and abroad, the securities Times reporter specially interviewed senior tax experts--Dong, general manager of Beijing China Administration Tax Division Office.

Tax concessions based on "scale" standards

Reporter: In accordance with the new article 87th last year, venture capital enterprises can still only be "small and medium-sized High-tech Enterprise Investment 70%" to calculate taxable income deduction. Industry insiders generally reflect that the "size" and "high" double standards are too stringent. What do you think is the direction of improvement in the future?

Dong Cloud: Double standards are indeed a bit strict, especially in the adoption of the new "High-tech Enterprise" standards, the investment enterprises can meet the "small" and "high" standard is less. According to the initial understanding of venture capital enterprises, venture capital enterprises to meet the "small and medium Enterprises" standard of up to 90%, but in line with the "small and medium High-tech enterprises" average of less than 50%, individual can reach 80%, most of only 40% or so. Therefore, although all types of corporate venture capital enterprises can more or less enjoy some income tax deduction, but enjoy the strength of the "High-tech" standard greatly discounted.

In foreign countries, because the scientific and technological content is a relatively difficult to define the variable, and the size of the enterprise relatively easy to approve, so generally only the "medium and small" scale standards. It is stipulated that venture capital enterprises can only invest in small and medium-sized enterprises by means of risky investment such as equity. In order to cover the investment risk, venture capital enterprises will naturally choose the High-tech small and medium sized enterprises with high growth, so they can indirectly achieve the policy goal of supporting the technology undertaking by adopting the "medium and small" scale standard.

From the perspective of enhancing the role of venture capital enterprises in supporting the development of SMEs and increasing the operability of the tax policy of venture capital, we should also use international practice to relax the investment standards of venture capital enterprises applying for income tax deduction to a single "medium and small" scale standard. If it is necessary to directly reflect the role of venture capital support technology innovation, it is suggested that the "according to a certain proportion of investment in small and medium-sized enterprises to apply for taxable income deduction" on the basis of, if the investment enterprises are High-tech enterprises, add a certain proportion of taxable income deduction.

The company system, the partnership system, the tax burden each has the superiority

Reporter: The illegal person's limited partnership venture capital fund itself does not have to pay taxes, but the legal person venture capital enterprise may enjoy the tax deduction preferential treatment, but after all must act as the tax main body. In this regard, do company-type venture capitalists really have an advantage in taxes?

Dong Cloud: This requires specific analysis. Because according to the 26th of the Enterprise Income Tax law, "the income of equity investment such as dividend and dividend between eligible resident enterprises" is "tax-free income", the company-type venture capital fund does not necessarily have double taxation similar to that in the United States. Under the current Chinese tax system, which type of venture capital enterprises have more advantages in tax revenue, the key is to look at the investors themselves in the different characteristics of tax obligations.

For insurance companies, commercial banks, securities companies, real estate companies, industrial enterprises and other business investors need to pay taxes, if the investment of a limited partnership venture capital Fund, its investment through the Fund to engage in venture capital without paying tax in the fund link, but must be taxed in the investor link. If you invest in a corporate venture capital fund, the proceeds of a venture investment through a fund may need to be taxed in the fund, but the fund can be used as a "tax-free income" when it allocates after-tax income to such investors. It can be seen that for these tax-paying business investors, if the tax incentives are not taken into account, their investment in corporate funds or partnership funds is actually quite a tax. If you take into account that corporate venture capital funds can enjoy income tax deduction, the ultimate burden on investors will be lower. Therefore, the insurance companies, commercial banks, industrial enterprises and other enterprises need to pay taxes are more suitable for investment company-type venture capital funds.

For natural investors, if the investment in the company-type venture capital fund, in the fund link to 25% of the tax rate to pay the enterprise income tax, in the natural link still need to pay 20% of the investment income tax, the total tax burden: "25%+ (1-25%) x20%=40%." If the investment in the limited Partnership venture capital fund, its profits from the fund, in the investor link according to "Business Management income", the levy of 5%-35% of personal income tax. Although there is no question of duplication, the tax advantage of limited partnership is not obvious because the marginal tax rate is too high and the annual income exceeds $50,000, which requires 35% tax. Especially when considering that the company-type venture capital fund can enjoy the income tax deduction factor in the fund link, the actual tax burden of the natural person invests in the company type Venture capital fund is very likely lower than invests in the limited Partnership type Venture capital fund. In addition, the individual investors can also get the tax benefit of delaying the tax if they use the proceeds to reinvest. In particular, the state finance and taxation departments are considering how to avoid the double taxation problem of individual investment company-type enterprises (including corporate venture capital fund Enterprises). If the individual can also be compared with the corporate enterprise, the tax dividends from other corporate enterprises can also be regarded as after-tax income and no longer levy income tax, it will greatly motivate individuals to invest in the company-type venture capital fund enthusiasm.

However, for Social Security Fund, enterprise annuity, such as the tax-exempt subject, because the investment in the company-type venture capital enterprises may need to bear some of the tax burden (unless the investment venture funds to apply for tax deduction is sufficient to deduct all taxable income), from the angle of tax relief, It is more suitable to set up venture capital fund according to limited partnership.

For the investors who apply low tax rate (such as High-tech Enterprises, the income tax rate is 15%), the key is to see whether the actual tax deduction of the legal person venture capital fund is lower than the tax on the investors. It is more appropriate to invest in a company-type venture capital fund if the actual tax burden after the tax deduction is lower than the tax on the investor link;

For mergers and acquisitions funds that have no access to tax incentives (i.e., narrow private equity investments), if we do not consider the company-type can establish a more perfect corporate governance mechanism and other factors, but only from the tax point of view, because the limited Partnership fund in the Fund link does not need to pay taxes, therefore, whether it is the Social Security Fund, enterprise annuity, such as the tax-exempt subject , or the low tax rate of High-tech enterprises, may have more tax advantages.

Balance Limited Partnership Enterprise tax burden

Reporter: What new trends does the international community have on the tax policy of the partnership enterprises at present? What is the root of the "black Stone tax scandal"? What is the main content of the United States is reforming the tax system of partnership companies?

Dong Cloud: First of all, introduce the current U.S. tax treatment of partnership-type private equity funds. Under the United States tax system, the partnership-type Private equity fund itself is not a taxpayer, and all of its income and expenditure are distributed directly to the partners according to the "Flow principle", and the partners declare income tax based on the type of income. The strict classification of taxable income is an important feature of American personal income tax system, and the types of taxable income affect the tax burden of private equity partners to a great extent. The management fee charged by the general partner (about 2% of its managed assets) is a work income, will be taxed at a progressive rate of up to 35% per cent, and the performance split as capital gains, in accordance with the maximum of 15% per cent of the capital income tax rate, and in the proportion of investments agreed upon in the partnership contract, such as long-term capital gains, Levied at a capital gains rate of not more than 15% per cent.

However, the current United States tax system for the partnership has also caused a lot of controversy, many people criticized the partnership has become a legal means of tax avoidance, and in 2007 Blackstone Partnership Group on the eve of public listing to become a shock to the global "black stone tax case storm." There are three main criticisms against the partnership tax avoidance:

The first is whether the public listed partnership itself should be the tax subject. In the United States, companies must pay a federal income tax at a rate of 35% per cent, plus a 10% or so state tax, and the partnership could not bear any tax burden, thus leading to an increasing number of businesses that were originally set up in the form of a company that used the name "partnership" to avoid tax. After news of the Blackstone Partnership was launched, in June 2007, the chairman of the Senate Finance Committee, Democrat Borks (Max Baucus) and Republican Goshley (Charles Grassley) submitted a bill to the United States Congress on whether the partnership should be the subject of a tax. They believe that the partnership, after the listing of the shares of the company after the same liquidity benefits, should be the same as the company's tax. Otherwise, we cannot guarantee the fairness and integrity of the tax system.

Second, whether the share of the partnership is allocated to the general partner should be treated as capital benefit. For corporate funds, not only does the fund itself have high taxes, but the division of performance allocated to the general partner must also pay 35% Federal income tax, plus about 10% of the state tax, on the basis of ordinary income, and for partnership funds, not only the fund itself is not taxed, but the performance of the general partner is divided according to the It may also be regarded as capital gains and will be subject to a capital gains tax of not more than 15%. In June 2007, Democratic Congressman Sandrievi also submitted a motion that was extremely unfair, and called for the division of Performance of the Partnership Fund to be allocated to the general partner in accordance with the performance of the corporate fund assigned to the management company as a general income, paying 35% federal income tax on the ordinary income, Plus a state tax of around 10%.

Third, whether the capital gains tax rate is too low. In this respect, Buffett has publicly said through NBC, he is a high-income class, but because the main income from capital gains, should apply the highest rate of not more than 15%, his secretary is a low-income class, but to pay a real tax rate of more than 30% of the payroll tax. In this regard, many of the high-income earners such as Baffi that the capital tax rate should be increased.

It is because of the serious social problems caused by the American partnership tax system that Mr Obama is determined to implement a series of reforms after taking office. On February 26, 2009, when Obama presented his 2010 Budget to Congress, a strong demand for the "performance split" of the Partnership Fund is considered to be "long-term capital gains" (the highest tax rate is no more than 15%) and is taxed according to the "Ordinary income" of the Corporate Fund (the federal rate is 35%, another California tax 10% or so). The issue of how the partnership itself should be taxed against the company and how to raise the capital gains tax is still in evidence.

From the international community on the development trend of the tax system of partnership enterprises, more and more countries begin to implement the principle of "substance over form". For the traditional partnership, because it is not an independent business entity, but only a contractual relationship attached to the partners, it should not be able to tax the contractual relationship, but only in the partners tax. However, as the partnership gradually draws on the company's mechanism, it is becoming more and more similar to the corporate entity (which, like the company, enjoys the state's public administration and defense services, as well as the company can convert its annual income into capital), and therefore, from the perspective of preventing tax evasion and fair taxation, Many countries, according to the actual characteristics of the partnership, and correspondingly adopt three kinds of different partnership enterprise Tax model: One is not the partnership enterprise as the main body of the non-entity model, mainly popular in the partnership has not yet evolved into independent entities of the country; the second is to regard the partnership as an independent tax body, the entity model, The main popular in the partnership has evolved into an independent entity of the state, the third is between the entity model and the non-entity model of the quasi-entity model, the model in the partnership link for the unified income and cost accounting, but the net income of the partnership in the partner sector tax. In these countries (such as Germany, Australia, etc.) which have a fair tax burden on the company and the partnership, because the company is superior to the partnership in the internal Mechanism, its venture capital fund has been in the mainstream of the company.

Local tax preference should be regulated and orderly

Reporter: Can china effectively avoid the "black stone tax case storm"? Some local governments have introduced tax incentives for partnership-type equity investment companies in the past few years, while the state finance and Taxation departments have introduced tax policies for partners in partnership Ventures. are local policies continuing to be effective in situations where local and central policies are clearly inconsistent?

Dong Cloud: In our country, because the property system of the individual and the enterprise is not perfect, prevent the partnership enterprise evade tax is more difficult. Therefore, the state finance and Taxation department in 2000 to develop "on individual-owned enterprises and partnership investors levy personal income tax" (tax [2000]91), when the very cautious. While taking into account that partnerships can only be established under ordinary partnerships and that partners can only be natural persons, the partnership will not develop in a large area, and that the state is in dire need of encouraging individual entrepreneurship and employment, article 91st sets the general partnership as a non-taxable entity; Article 91st also adopted a series of provisions to prevent market abuse of the partnership tax avoidance.

The newly amended Partnership Enterprise Law allows a partnership to be established under a limited partnership, and such institutions may also be partners in a limited partnership. Under such circumstances, the task of preventing the market from partnership avoidance is more arduous when all kinds of partnership, including processing trade and consulting service, are regarded as non-tax subjects. To this end, the Ministry of Finance and the State administration of taxation had to undergo a long period of research, only in December 2008 jointly issued the "Partnership corporate partner income Tax Issue notice" (abbreviation 159th). Article 159th, on the one hand, complies with the seventh article of the Partnership Enterprise Law, the non-taxable subject of the partnership business; On the other hand, it makes up the limitation that the partnership may become a tax avoidance tool.

From the practical level, although it is not possible to assert that the 159th text must be able to effectively prevent, but at least conducive to prevent the "black stone tax case" in China repeat. First, it is necessary to prevent the partnership enterprise from becoming a tax avoidance tool by stipulating that the profits of the partnership should be taxed, whether distributed or retained. The second is to stipulate that the tax rate of the natural person partner, whether the general partner or the limited partner, shall be carried out according to the "Business income tax rate", and be able to prevent the de facto general partner from "the business income tax" of the higher tax rate under the name of "limited partners". The third is to stipulate that "the partnership shall not agree to allocate the proceeds to some partners", which will help prevent the partnership from avoiding tax through the affiliated partners. The other is to stipulate that the loss of the partnership should not be used to deduct the tax base of the investment subject, and it can further prevent the partnership enterprise from making the total loss of the account to reverse the tax base of the investment subject.

Before the promulgation of "article 159th", some local governments, in order to attract local institutions to settle down in China, were competing for the Chinese Equity Investment Center, and the preferential tax policies were introduced to encourage equity investment enterprises to set up a limited partnership. These policies are clearly inconsistent with the provisions of article 159th. January 19, 2009, the Ministry of Finance, the general administration of taxation issued "on the resolute suppression of ultra vires Tax relief to strengthen the rule of law" notice, clear central tax, sharing tax and local taxes, the legislative power is concentrated in the central. The financial and tax departments at all levels shall not change, adjust and adapt the national tax law and the tax policy without authorization of the administrative authority expressly granted by the tax law. It can be seen that some local governments have formulated tax preferential policies that do not have legal effect.

Tax avoidance of venture investment

Reporter: Domestic on the one hand to the company-type venture capital to implement tax preferential policies, on the other hand, the partnership-type venture capital of the tax policy reflects the "emphasis on tax avoidance" principle. Is this unfair?

Dong Yun: On this issue, at the 2008 Beijing Branch Fair, the State Administration of Taxation Law Department of the Director of the speech has some enlightening. He pointed out that to reflect the fairness of tax burden, just adhere to the principle of taxation neutrality, but tax concessions should also consider two factors: first, this preferential policy does not encourage tax evasion, and second, not to cause market risk.

According to the above guiding ideology, it is relatively difficult to make the Partnership fund as a non-tax subject, and then give the incentive to tax incentives. Moreover, at present, not only the United States has a "black stone tax case of the storm," the domestic use of the partnership of tax avoidance convenience to cheat investors, and then carry out illegal fund-raising events also began to appear frequently. In making use of the limited partnership for illegal fund-raising, some agencies declared openly: "The State encourages the establishment of a fund in partnership, and the Partnership Law stipulates that the Partnership fund does not pay any taxes!" Local governments are also required to pay a 20% low income tax to encourage their partners to attract other investors to invest locally. Also, you don't pay taxes in the partnership, and it's hard for the tax department to find you. Unlike partnership funds: the company fund itself is regarded as the taxpayer, it is very difficult to evade tax, plus can establish corporate governance structure, to protect investors ' rights and interests, to maintain financial order, to avoid market risk, therefore, through the preferential tax policy to encourage venture capital fund according to the company type, under the current conditions of China is understandable

It needs to be added that the tax incentives are focused on the corporate model, not just in the field of venture capital. Guarantee companies, advanced service enterprises and other areas of tax concessions are only for the company-type.

June 22, 2007, the Blackstone Group in the NYSE IPO, the Blackstone Market still chose to retain the partner system, so when its proceeds to be allocated to the manager, it will only pay 15% of capital gains tax, rather than 35% of the corporate tax. This led to a shocking global "black stone tax scandal", the sharp contrast between high income and low tax rates has aroused widespread concern in the United States, while the United States Congress on the partnership system and its enjoyment of the low tax dispute. At present, the limited partnership system in China is developing rapidly, and its tax problem is quite controversial, so it is necessary to make proper arrangement on the tax system to prevent the "black stone tax case" from happening in China.