Shenzhen and Xiamen Further Encourage Equity Investment

November 8, 2011 Posted by China Briefing Reading Time: 5 minutes

Nov. 8 – Local governments of several Chinese coastal cities are offering further incentives to equity investment enterprises, as private equity (PE) investment has emerged as one of the most important capital-raising avenues for small and medium-sized enterprises in those areas.

Shenzhen: PE Development Fund
In order to offer various fiscal incentives to PE funds, Shenzhen established a PE Development Fund (PEDF) and recently clarified the operation procedures for PE funds that intend to apply for the financial support extracted from the PEDF.

According to the “Operation Procedures for PE Funds’ Application for the Use of the PEDF (shenfujinfa [2011] No.5)” and the “Regulations on Promoting PE Funds Development (shenfu [2010] No.103),” all types of Shenzhen-registered equity investment enterprises – regardless of whether they are Chinese-invested, foreign-invested or jointly-invested – will be able to apply for the use of the PEDF if they meet the following criteria corresponding to their own corporate nature:

A PE fund shall have a registered monetary capital of no less than RMB100 million and the initial funding in place shall not go under RMB50 million. Shareholders or partners shall all invest in their own names and the funding from each individual shareholder/partner shall be no less than RMB5 million. Where the PE fund is established in the form of a limited liability company or partnership, the number of its shareholders/partners shall be no more than 50; where the PE fund is established in the form of a limited corporation, the number of its shareholders shall not be more than 200.
A PE fund management enterprise shall have a registered capital of no less than RMB10 million if it is established in the form of a limited corporation; it shall have an actual receipt capital of no less than RMB5 million if it is established in the form of a limited liability company or partnership.
A private securities investment fund management enterprise shall have a registered capital of over RMB10 million and manageable assets of over RMB100 million.

Incentives offered to those PE funds include:

Reward for local financial contributions: A reward amounting to 100 percent of a PE fund’s local financial contributions – based on the enterprise’s business turnover and corporate income – will be offered during the first two years, and a reward amounting to 50 percent of the PE fund’s local financial contributions will be granted during the next three years. The application for the reward will only be accepted between May 20 and August 10 every year.
Office purchase subsidy: A one-time subsidy amounting to 1.5 percent of the office purchase price will be offered to either the PE fund or the PE fund’s management enterprise. The total amount of the subsidy shall not exceed RMB5 million and the subsidized office shall not be for sale within the next 10 years.
Office rent subsidy: A three-year subsidy amounting to 30 percent of the market office rent will be granted to either the PE fund or the PE fund’s management enterprise. The total amount of the subsidy shall not exceed RMB1 million and the application for the subsidy will only be accepted between January 1 and February 28 every year.
One-time settlement reward: A reward amounting between RMB5 million and RMB15 million will be given to a PE fund settled in Shenzhen based on its registered capital size (if the fund is established in the form of a corporation) or the size of the fund that was actually collected upon establishment (if the fund is established in the form of a partnership). The rewarded PE fund shall remain settled in Shenzhen within the next five years.
One-time reward for investment withdrawal: A one-time reward amounting to 30 percent of a PE fund’s local financial contribution (or a PE partner’s local financial contribution based on his/her income tax) will be offered upon the fund’s withdrawal from an enterprise or a project. However, the total amount of the reward shall not exceed RMB3 million.

Xiamen: Government Guide Fund
In order to increase equity investment companies’ participation into encouraged industries, the Xiamen local government established the Government Guide Fund, a fund that will join and follow up desired PE investments and provide risk allowance to better secure investments.

According to the “Regulations on Promoting the Development of Equity Investment Enterprises (xiafu [2011] No.443),” Xiamen’s incentives offered to eligible equity investment enterprises include:

Office purchase and rent subsidies: An equity investment enterprise with a registered capital of over RMB1 billion will receive an office purchase subsidy amounting to 5 percent of office purchase price or a three-year office rent subsidy amounting to 20 percent of office rent. The total amount of office purchase subsidy shall not exceed RMB4 million or RMB800 per square meter and will be spread into a five-year payment; the total amount of office rent subsidy shall not exceed RMB800,000.
Reward for local tax contributions: An equity investment enterprise will be granted a reward amounting to 50 percent of the enterprise’s local corporate/individual income tax (CIT/IIT) contribution during the first two years, and a reward amounting to 25 percent of the enterprise’s local tax contribution during the next three years.
Reward for investment withdrawal: A complete withdrawal of an equity investment from a Xiamen-based enterprise or project will obtain a one-time reward amounting to 5 percent of the equity investment enterprise’s actual local tax contribution.
Reward for equity investment management enterprises: A profitable equity investment management enterprise will receive a five-year reward:
1) Amounting to 20 percent of the its local CIT contribution if the enterprise’s assets under management range between RMB200 million and RMB500 million
2) Amounting to 30 percent of the its local CIT contribution if the enterprise’s assets under management range between RMB500 million and RMB1 billion
3) Amounting to 50 percent of the its local CIT contribution if the enterprise’s assets under management exceed RMB1 billion
Incentives for talents in scarcity: An executive employed over a year at an equity investment enterprise will be offered a three-year reward amounting to 40 percent of his/her local IIT contribution; a professional in the related field will enjoy distinct types of social benefits, such as faster visa issuance, better social insurance package and favorable housing policies.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. The firm specializes in assisting foreign enterprises take advantage of incentives in the country. For advice, please email info@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

This article is also available on Dezan Shira & Associates’ online business resource library. To view the article, and other regulatory updates, please click here.

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