CHINA Law and Practice Contributed by: Zhen Chen, Candy Tang, Flora Qian and Yan Zhao, Fangda Partners
have long-arm jurisdiction. The underlying products of offshore feeders may be RMB funds in China. 4.7 Compensation and Placement Agents Placement agents and distributors are regulated enti - ties under PRC law. Only institutions that (i) have obtained CSRC approval for fund sales licence; (ii) have registered with AMAC as private fund service institutions; and (iii) are AMAC members can act as placement agents or distributors for private funds in China. These institutions are called “Fund Sales Insti - tutions”. Under current regulations, a fund manager’s personnel are not prohibited from receiving compensation for the sales efforts. Costs of placement agents and invest - ment relation (IR) personnel are typically assumed by fund managers, not the funds. The expenses with respect to the offering and sales of fund interests, such as external counsel costs, can be borne by the funds, and RMB fund investors typically request caps on such organisational costs. 4.8 Tax Regime for Investors The tax regime applicable to investors in the private funds market depends on the form of the fund (ie, corporation, partnership or contractual fund). • Corporation: Private funds in the form of corpora - tions are subject to corporate income tax, so that the principle of “distribution after taxation” applies. Once distributed to the investors, if the investor is an individual, the investor should pay additional individual income tax on the distributions (ie, giving rise to the dilemma of double taxation), and if the investor is a tax-resident enterprise for corporate income tax purposes, the investor may be waived from paying additional corporate income tax on the distributions (ie, avoiding double taxation). • Partnership: If the RMB fund is organised as a partnership, the fund is transparent for the purpose of income tax. Taxable income/loss is calculated at the level of the partnership while income tax is paid by the partners, respectively, based on the specific conditions. If the partner is an individual, the partner should pay individual income tax on the taxable income, and if the partner is a legal person or other organisation, the partner should
pay corporate income tax on the taxable income. The taxable income includes the income distrib - uted by the partnership to all partners and the income (profit) retained by the partnership in the relevant year. Therefore, no income tax is payable at the fund level. For the avoidance of doubt, VAT and other surcharges, if applicable, are still pay - able at the fund level. The partners will determine their taxable income based on the distribution ratio specified in the partnership agreement; and where the partnership agreement does not specify a dis - tribution ratio, the taxable income for each investor should be calculated equally. The fund manager or other withholding agents may withhold and remit the taxes payable by the partners on such income pursuant to the relevant PRC tax collection regula - tions. • Contractual Fund: Contractual funds are generally not regarded as taxable entities. As for the inves - tors, if the investor is an individual, the investor should pay individual income tax, and if the inves - tor is a legal person or other organisation, the investor should pay corporate income tax, on the distributions derived from the fund and/or the gains derived upon transferring the funds. Additionally, private funds engaging in venture capi - tal investments may enjoy preferential tax treatments, such that if the fund invests in eligible seed-stage or start-up technology companies through equity invest - ment, 70% of the investment amount can be deduct - ed from taxable income in the year when the equity holding period reaches two years. Any unused deduc - tion may be carried forward to subsequent tax years. 4.9 Double Tax Treaties Offshore investors of private funds are entitled to treaty benefits (if applicable), provided that the PRC has concluded such treaty with the country where the offshore investor is a tax resident to avoid double taxation. Furthermore, if the investor is a partnership estab - lished pursuant to the laws of a foreign country (region) with effective management located outside China, but which has an establishment or a place in China, or which has no such establishment or place but has income sourced from inside China, the investor is a
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