Global

Details

  • Service: Tax, International Corporate Tax, Global Compliance Management Services
  • Type: Regulatory update
  • Date: 6/27/2012

China - Partnership tax changes; implications for private equity funds 

June 27:  Since the roll-out of China’s revised partnership law—allowing the use of both domestic and foreign invested partnerships as business vehicles in China—many private equity fund managers have taken advantage of these rules to establish “RMB funds” using a limited partnership structure.

However, the current tax laws and regulations provide limited—and not entirely consistent—guidance on the tax treatment of partnerships and partners, thereby creating much uncertainty for private equity investors and investment professionals regarding the final tax liabilities on returns from investments in private equity funds.


To promote the development of the private equity industry, many local governments in China have allowed favorable tax treatment. Some of this treatment appears to be contradictory to the existing tax laws and regulations in relation to the taxation of partnerships.


Although the State Administration of Taxation, thus far, generally has been silent on this matter, it has been reported that the tax authorities are in the process of drafting a new regulation on partnership and partners' tax treatments. Tax professionals believe that, based on informal discussions with the tax authorities, new regulatory guidance would be designed to eliminate uncertainty. It is believed this guidance is likely to be finalized and released in the near future.


It is also possible that under new guidance, the tax treatment applied to partnerships that are established to conduct active business activities may differ from the tax treatment applicable to partnerships that are designed to make passive investments—such as private equity funds. If so, the impact of the new guidance on the private equity industry could be profound.


Read a June 2012 report [PDF 141 KB] prepared by the KPMG member firms in Hong Kong and China: Potential changes to the tax treatment of partnerships and the implications for private equity funds



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