The Chinese-language International Finance News reported last Friday that a new rule on foreign access to China's venture-capital sector would very likely be issued in two weeks.

The new rule is being drafted by the Ministry of Foreign Trade and Economic Cooperation, the Ministry of Science and Technology, the State Administration of Taxation, the State Administration of Foreign Exchange and the State Administration for Industry and Commerce. It will dramatically lower the tax rate for foreign-funded venture-capital firms, said the newspaper.

The tax rate for foreign-funded venture-capital firms will be lowered from the present 33 percent to 15 percent or even less, it said.

The move is expected to increase the profits of foreign-funded venture-capital firms and stimulate rapid growth of foreign investment in China, said Ni Zhengdong, president of the Qingke Co, an organization that researches venture capital.

In many other countries, foreign investment using venture capital is normally exempt from capital-gains tax. But, in China, venture-capital firms have to pay capital-gains tax on projects that they fund and they have to pay corporate tax of up to 33 percent.

Even if venture-capital firms invest in high-tech companies, they are not entitled to enjoy the preferential corporate-tax rate of 15 percent that high-tech companies enjoy at present.

Experts say the dual-taxation system is a major hurdle to the growth of venture capital in China. The Chinese foreign-trade official, who declined to be named, said the government is devising preferential tax treatment and financial support schemes for venture-capital firms but these measures are not to be included in the new rule.

The new rule is mainly concerned with lowering the entrance requirement for foreign investors in the venture-capital sector, he said.

Under a temporary rule issued last year, at least one of the foreign investors among a number of foreign investors who want to set up a venture-capital joint venture with their Chinese partner must have managed more than US$100 million in assets and invested at least US$50 million in the three years preceding the application to set up a venture-capital firm.

At least one of the foreign investors must have had net assets of more than US$100 million in the year before the application and must put at least US$20 million into the venture-capital firm or 3 per cent of the firm's total assets, according to the temporary rule.

The official said the rule was awaiting final approval from the relevant ministries and would be issued "soon." But he did not confirm the "two weeks" timescale, saying it would not necessarily be as quick as that.

(China Daily November 11, 2002)