Private Equity Tax Express - Issue 2, June 2012
Since the roll-out of the revised Partnership Law, which allows the use of both domestic and foreign invested partnerships as business vehicles in the PRC, many private equity fund managers have taken advantage of these rules and have established so-called RMB funds using a limited partnership structure. The current tax laws and regulations provide limited and not entirely consistent guidance on the tax treatment of partnerships and partners. This has created much uncertainty for private equity investors and investment professionals regarding the final tax liabilities on the returns from their investments in private equity funds.
To promote the development of the private equity industry, many local governments allowed favourable tax treatments. Some of these treatments appear contradictory to the existing tax laws and regulations in relation to the taxation of partnerships. Although the SAT has so far been generally silent on this matter, it is reported that they are in the process of drafting a new regulation on partnership and partners' tax treatments.
Through our representation for a number of private equity associations in the discussions with the SAT during the drafting process, we understand that this new regulation (potentially a number of regulations) is likely to be finalised and released soon and is designed to eliminate these uncertainties. The tax treatment applied to partnerships which are established to carry out active business activities may differ from the tax treatment applied to partnerships which are designed to make passive investments, such as private equity funds. The impact of the new regulation on the private equity industry will be profound.