In order to promote venture capital investment and to support small to middle sized business, the Ministry of Finance and the State Administration of Taxation have jointly promulgated the Circular on Pilot Tax Policies for Venture Capital Firms and Individual Angel Investors (Cai Shui  No. 38 ) (the “Circular“) on April 28, 2017. The tax policy will be provisional in the pilot areas of Beijing-Tianjin-Hebei, Shanghai, Guangdong, Anhui, Sichuan, Wuhan, Xi’an, Shenyang, and Suzhou Industrial Park.
The pilot tax policies set forth in the Circular include:
- For corporate venture capital firms who have made direct equity investment by way of capital increase in a tech firm in seed stage or early stage (“tech startup”) for at least two full years, it may deduct 70% of the investment amount from its taxable income in the second full year of holding equity shares of the tech startup, and such deduction may be carried forward in later years if its taxable income is not enough for deduction.
- For limited partnership venture capital investment enterprises that have made direct equity investment in a tech startup for at least two full years, both its corporate partner and individual partners may deduct 70% of their investment amount from income (for corporate partner) and business income (for individual partners) distributed from such partnership enterprise and such deduction may be carried forward in later years;
- For individual angel investors who have made direct equity investment in a tech startup for at least two full years, the individual is allowed to deduct 70% of his/her investment amount from the taxable income derived from transfer of the equity shares in the tech startup, and such deduction may be carried forward.
In the event that an individual angel investor is unable to deduct its investment because the tech startup is undergoing liquidation, the remaining amount may be deducted from the taxable income derived from his/her transfer of other tech startups within 36 months from the deregistration/liquidation date.
In the event of a tech startup that has accepted individual angel investor’s investment for at least two full years becomes a listed company on the Shanghai Stock Exchange or Shenzhen Stock Exchange, the individual investor shall follow the current stipulations regarding restricted shares to sell his/her stocks of the tech startup and his/her remaining investment amount to be deducted can be calculated and deducted from his/her tax payable for such stocks sales.
The Circular also sets forth the qualifications for tech startups, VC investment enterprises and individual angel investors:
- For Tech Startups:
(1) Registered in China mainland and subject to taxation by accounts audit;(2) At the time of investment, the number of employees (including dispatched employees) shall be no more than 200, among which there shall be no less than 30% of employees having bachelor’s degree or higher; each of the total assets and the annual sales revenue shall be no more than CNY30 Million Yuan;(3) At the time of accepting investment, it shall be established for no more than five years.
(4) Shares have not been listed in stock exchanges at home and abroad within two years of acceptance of investment;
(5) In the year of investment acceptance and the next tax year, the total costs for R&D shall be no less than 20% of the cost expenditures;
- For Venture Capital Investment Enterprises
(1) Subject to taxation by accounts audit and registered in the pilot area stipulated in the Circular, and not being the initiator of the tech startups;(2) Has completed filing with the National Development and Reform Commission or Asset Management Association of China under China Securities Regulatory Commission.(3) The total equity held by the VC investment enterprise and its affiliates in the tech startup within two years after its investment shall be less than 50%
- Individual Angel Investor
(1) Not the initiator, employee or their relative (including spouse, parents, children, grandparents, maternal grandparents, grandchildren, maternal grandchildren, siblings, the same below) of the invested tech startup; no labor dispatch relation with the tech startup;(2) The total equity held by the individual angel investor and his/her relatives in the tech startup within two years after his/her investment shall be less than 50%;(3) The tech startup invested by the individual angel investment investors shall be registered in the pilot areas.
 Investment amount always refers to the actual contributed investment.
 This is an average number for the period of a successive of twelve months prior to acceptance of the investment. Same for the total assets figure.
 Costs include business costs of key and other business items, sales expenses, management expenses and financial expenses.