In August 2008, in order to attract the private equity ("PE") investment in Shanghai, four governmental divisions of the Shanghai Municipality jointly issued the Notice on Business Registration and Other Issues of Equity Investment Enterprises ("Notice"), which regulates the categories, investors, forms, capital, and taxation of equity investment enterprises.
According to the Notice, equity investment enterprises have two categories: one is the Equity Investment Enterprise, which operates equity investment activities, and the other is the Equity Investment Management Enterprise, which engages in the management of equity investment with the Equity Investment Enterprise’s authority.
Those who seek to invest, pursuant to China’s laws and regulations, in equity investment enterprises include both domestic and foreign investors, and these can be natural persons, artificial persons, or other entities.
The Notice stipulates that any equity investment enterprise shall be organized as a partnership enterprise, a limited liability company, or a joint stock limited company.
For the Equity Investment Enterprise, the minimum registered capital shall be equal to or more than RMB 100 million yuan; investors shall contribute capital only by cash; and if the investor is a natural person, that person’s minimum capital contribution shall be equal to or more than RMB 5 million yuan.
If an Equity Investment Management Enterprise is organized as a limited liability company, the minimum paid-up capital shall be no less than RMB 1 million yuan; if it is organized as a joint stock limited company, the minimum registered capital shall be no less than RMB 5 million yuan.
When an equity investment enterprise is formed as a limited partnership, the partners shall pay income tax on the revenue and other income of their equity investment enterprise. If general partners are natural persons, their income tax is calculated subject to progressive tax rates that range from 5% to 35% under the Tax Rates Table 2 of China’s Individual Income Tax Law. The income tax rate for limited partners who are natural persons is 20%.
According to the August 2008 data of the Shanghai Administration of Industry and Commerce, there were at that time 216 equity investment enterprises in Shanghai, and 66 of these enterprises had been set up as limited partnerships. Moreover, 41 of these limited partnerships were located in Shanghai Pudong New Area ("Pudong"), and they raised funds of more than RMB 3 billion yuan. Given that the PE industry is currently booming in China, the Notice offers an appealing opportunity for more PE firms to establish and develop business in Shanghai.
With regard to the specifics in the Notice, the taxation policy might pose some problems for general partners. Under China’s Individual Income Tax Law, if general partners’ income, minus costs, charges, and losses, exceeds RMB 50,000 yuan, anything above that amount shall be taxed at 35%. It is plain that most general partners are able to earn huge amounts of money in the PE business, and for that reason they are likely to be frustrated by this tax policy in Shanghai. In contrast, the individual income tax in Hong Kong is only 15%.
Though the taxation in the Notice sounds less attractive, it is reported that the Pudong Government is planning to provide a range of preferential policies for PE business. These include: offering subsidies to senior and medium management in equity investment enterprises; providing promotional fees of between RMB 3 and 15 million yuan to newly opened equity investment enterprises in Pudong; and establishing a business center for equity investment enterprises in the Lujiazui or Zhangjiang area.