CHINA Law and Practice Contributed by: Alan Du and Yiwei Shi, King & Wood Mallesons
tributions prior to other unit holders), the total assets must not exceed 140% of the net assets. The Guiding Opinions do not directly apply to private funds, and the AMAC has indicated that it would issue a detailed rule applicable to private funds in accordance with the Guid - ing Opinions. However, such a rule has not yet been published, and it is advisable to follow the restrictions of the Guiding Opinions. In practice, it is not common for private equity funds to borrow to make investments. Addition - ally, fund contracts may also set restrictions such as prior approval on each borrowing. Security for Borrowing In the PRC, it is common for banks to take collat - erals such as real property or marketable securi - ties, or to seek a guarantee from guarantors with capability of repayment. Sometimes, the fund manager or its affiliate may provide a bridge loan or warehousing to a fund without security. 2.6 Tax Regime The applicable tax regime for private funds depends on the form of the fund and the type of income. Limited Company Funds A limited company fund itself is subject to enter - prise income tax (EIT) at the rate of 25%. Income tax also applies to investors, depending on the investor type: • limited company investors are generally sub - ject to a 25% EIT on their own profit, but divi - dends from the limited company fund may be exempted to avoid double taxation after the limited company fund has paid its EIT; and
• for individual investors, a 20% individual income tax (IIT) shall apply. Limited Partnership Funds Private funds structured as limited partnerships are tax-transparent for income tax, and for investors of such funds the tax treatments are as follows. For individual investors, due to the absence of clear tax law, the practice varies between differ - ent locations of China. Ideally, a flat rate of 20% IIT shall apply, but in some locations, a progres - sive rate from 5% to 35% shall apply. For a limited company investor, a 25% EIT applies to its profits. Though dividends received by a company from another company shall be exempted, uncertainty exists regarding the eligi - bility of the dividends paid by a portfolio compa - ny indirectly through a limited partnership fund to its limited company investors, which can be interpreted as distribution from the limited part - nership, instead of dividends from the portfolio company. The practice may vary between differ - ent locations of China. Contractual Funds As with limited partnership funds, contractual funds are also tax-transparent. Similar to the practice of investment trust com - panies in China for the IIT of individual investors regarding investment trusts under their manage - ment, the fund manager does not withhold the IIT for individual investors, and each individual investor shall be responsible for their own tax declaration. A limited company investor is subject to a 25% EIT on its profits, except for dividends received from another company.
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