CHINA Law and Practice Contributed by: Zhen Chen, Candy Tang, Flora Qian and Yan Zhao, Fangda Partners
Corporate funds are subject to the applicable provi - sions of the PRC Company Law and the Enterprise Income Tax Law, and are taxed in the same manner as general corporations. Dividends and other equity investment income distributed by corporate funds to resident enterprises may be treated as tax-exempt income and thus exempted from income tax. That said, if an enterprise investor transfers its shares in a corporate fund and achieves a capital gain, it will be subject to a 25% corporate income tax. For individual investors receiving income from corporate funds, such income will be taxed as either “income from property transfer” or “interest, dividends, and bonus income” with a tax rate of 20%. Limited partnership funds are tax-transparent entities and therefore no income tax will be charged at the fund level. Each partner of the partnership is treated as a taxpayer. For individual partners, interest, dividends, and bonus income from the investment by a limited partnership fund are subject to individual income tax at a flat rate of 20%; for other incomes from a limited partnership, such income will be subject to individual income tax with tax rates ranging from 5% to 35% under a five-tier progressive tax system. The fund will be obliged to pay tax on behalf of the individual inves - tors. If a partner is a corporation or other organisation, it is generally subject to corporate income tax at a rate of 25%. Venture capital funds will be entitled to some favourable tax treatments. Contractual funds are not regarded as taxable entities and are not subject to income tax. Instead, investors and fund managers are required to consolidate their respective incomes from the contractual fund and pay either corporate income tax or individual income tax accordingly. 2.5 Loan Origination Under the current PRC regulation, private funds are generally prohibited from engaging in lending busi - ness directly or in a disguised form, or from directly investing in credit assets and engaging in commercial private lending activities by means of entrusted loans or trust loans, etc. Private fund managers should not directly or indirectly use fund assets for non-investment activities such as
lending (or depositing), guarantees, or disguised debt investments (eg, equity with debt-like characteristics). However, a private fund is permitted to invest in con - vertible loans and, as an exception to the restriction on lending, a private fund may, for the purpose of equity investment, provide a loan or guarantee to its invested target for a term of no more than one year, provided that the maturity date of the loan or guar - antee does not extend beyond the exit date of the equity investment, and the outstanding balance of such loans or guarantees does not exceed 20% of the fund’s paid-in capital. On the other hand, it is in principle doable for a fund (except for venture capital funds which are explicitly prohibited from using leveraged financing) to act as a borrower to obtain bank financing. For funds man - aged by licensed fund management subsidiaries of securities companies subject to CSRC supervision, and funds admitting insurance investors subject to NFRA regulation, additional requirements would be applied on the fund’s leverage ratios. 2.6 Non-Traditional Assets Private funds are prohibited from engaging in irrel - evant or conflicting businesses such as lending busi - nesses or credit assets. Investment into the equity of companies carrying out conflicting businesses is also prohibited. Funds investing in commodities such as fine wines, artworks or other non-traditional assets such as digital assets are categorised as “other types of funds” by AMAC, but AMAC has currently suspended filing of this type of funds. In practice, private funds are not permitted to directly invest in non-traditional alterna - tive assets but instead may make equity investments in the portfolio companies that hold, manage and/or trade certain non-traditional alternative assets. 2.7 Use of Subsidiaries for Investment Purposes Private equity funds (in the context of this section, including venture capital funds) may make invest - ments through special purpose vehicles (each an SPV). However, the risks of using an SPV should first be specifically highlighted and disclosed to investors in the risk disclosure statements during the fundrais -
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