Editor's Note: In the first half of this year, some local tax authorities have started to implement risk countermeasures against the alleged violation of tax preferential policies for corporate venture capital enterprises. Up to now, the enterprise consultation received by Huatax shows that the tax incentives that are accused of enjoying in violation of the law are mainly the 15% tax rate of enterprise income tax for western development and the 15% tax rate of enterprise income tax for Hainan Free Trade Port, and the reason for violation is that the VC enterprises have not filed in accordance with Interim Measures for Administration of Venture Capital Enterprises, and do not have the qualification for enjoying the above mentioned tax incentives. The reason for denying the qualification of VC enterprises to enjoy the tax incentives is obviously the lack of clear and accurate tax law basis, which is difficult to be justified. This paper analyzes the rules related to the filing of Venture Capital Enterprises and the preferential policies of Hainan Free Trade Port.

01 IRD proposes to deny Hainan's eligibility for FTA tax incentives on the grounds that VCs have not filed for tax incentives

A domestic enterprise is a corporate venture capital enterprise registered in Hainan Free Trade Port in 2021, which is mainly engaged in the equity investment business of start-up companies, and its revenue from the main business of venture capital accounted for 100% of the total revenue of the enterprise. According to the relevant provisions of the Notice of the Ministry of Finance and the State Administration of Taxation on the Preferential Policies for Enterprise Income Tax of Hainan Free Trade Port (Cai Shui [2020] No. 31) and the Announcement of the State Administration of Taxation of Hainan Provincial Tax Bureau on the Issues Relating to the Preferential Policies for Enterprise Income Tax of Hainan Free Trade Port (Announcement of the Tax Bureau of Hainan Provincial Taxation of Hainan Provincial Taxation of No. 4 of 2020), the enterprise has self-researched and judged that its main business is in line with the Guidance Catalogue for the Restructuring of Industry The enterprise determined on its own that its main business is in line with the "Venture Capital" project in the "Guidance Catalog for Structural Adjustment (2019)" and meets the substantive operating conditions, and therefore took the initiative to apply the preferential tax rate of 15% for tax declaration at the time of EIT remittance for the years from 2021 to 2024.

In February 2025, the local competent tax authorities made a Notice on Tax Matters to the enterprise, considering that the enterprise had not filed in accordance with the Interim Measures for the Administration of Venture Capital Enterprises, and was not eligible for enjoying the preferential tax policies of Hainan FTTP, and requested the enterprise to make up for the previous year's tax and late payment within a certain period of time.

02 What are the conditions to be met to enjoy the 15% preferential tax rate for Hainan FTTP?

To determine whether the tax authorities have tax law basis to make the above taxing behavior, i.e., whether the tax authorities can deny the preferential tax qualification of Hainan FTTP on the ground that the Venture Capital Enterprises have not filed , it is necessary to examine from two aspects. One of them is what is the statutory application condition of Hainan FTTP preferential enterprise income tax policy, and the other is whether the preferential policies linked to the filing rules of Interim Measures for the Administration of Venture Capital Enterprises include Hainan FTTP preferential enterprise income tax policy. The first issue is analyzed here first.

The Circular of the Ministry of Finance and the State Administration of Taxation on the Preferential Policies on Enterprise Income Tax for Hainan Free Trade Port (Cai Shui [2020] No. 31) provides that "[e]nterprise income tax shall be levied at a reduced rate of 15% for enterprises in encouraged industries that are registered and substantially operated in Hainan Free Trade Port." Subsequently, the Tax Bureau of Hainan Province issued the "Announcement on Issues Related to the Preferential Policies on Enterprise Income Tax in Hainan Free Trade Port" (Announcement of the Tax Bureau of Hainan Province No. 4 of 2020), which clarifies the specific implementation matters of the preferential tax policies. Combining the provisions of these two documents, it can be summarized that enterprises enjoying the 15% preferential tax rate need to have the following three conditions:

First，Enterprises are to be registered and established in the Hainan FTZ.

Second，Enterprises shall take the industrial projects stipulated in the Catalogue of Industries Encouraged by Hainan Free Trade Port as their main business, and their main business revenue shall account for more than 60% of the total revenue of the enterprise.

CaiShui [2020] No. 31 makes it clear that the Catalogue of Encouraged Industries for Hainan Free Trade Port includes the Catalogue for the Guidance of Industrial Structural Adjustment (2019), the Catalogue of Encouraged Industries for Foreign Investment (2019 Edition), and the Catalogue of New Encouraged Industries for Hainan Free Trade Port. The "Venture Capital" project belongs to item 9 of the "Guidance Catalog for Industrial Structure Adjustment (2019 Edition)" under "Thirty, Financial Services", and also belongs to item 9 of the "Catalogue of Industries Encouraging Foreign Investment (2019 Edition)" under "VIII, Leasing and Commercial Business". It also belongs to Item 373 of "VIII. Leasing and Business Services" in the "Catalogue of Industries Encouraging Foreign Investment (2019 Edition)".

In January 2021, the National Development and Reform Commission (NDRC), the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) formally released the "Catalogue of Encouraged Industries for Hainan Free Trade Port (2020 Edition)", which determined that the catalog includes "encouraged industries in the existing national industrial catalogs" and "new encouraged industries for Hainan free trade port". The catalog includes "encouraged industries in the existing national industry catalog" and "new encouraged industries in Hainan Free Trade Port". Among them, "Encouraged industries in the existing national industrial catalog" is still based on the "Guidance Catalog for Industrial Structure Adjustment (2019)", "Encouragement of Foreign Investment in Industry Catalog (2019 Edition)" and its newly revised version, and "New Encouraged Industries for Hainan Free Trade Port" is still based on the "Encouraged Industries in the Existing National Industrial Catalog", and "New Encouraged Industries for Hainan Free Trade Port". "The specific items are clarified. The actual implementation period of the catalog is from January 1, 2020 to February 29, 2024.

Prior to February 29, 2024, the "Catalogue for the Guidance of Industrial Restructuring (2019 Edition)" was updated to the "Catalogue for the Guidance of Industrial Restructuring (2024 Edition)" on February 1, 2024, retaining the item of "Venture Capital"; the "Catalogue for the Encouragement of Foreign Investment Industries (2019 Edition)" was updated to the "Catalogue for the Encouragement of Foreign Investment Industries (2020 Edition)" on January 27, 2021, retaining the item of "Venture Capital". The Catalogue of Industries for Encouraging Foreign Investment (2019 Edition) was updated to the Catalogue of Industries for Encouraging Foreign Investment (2020 Edition) on January 27, 2021, retaining the item of "Venture Capital", and then updated to the Catalogue of Industries for Encouraging Foreign Investment (2022 Edition) on January 1, 2023, deleting the item of "Venture Capital". Venture Capital" was deleted from the Catalogue of Industries Encouraging Foreign Investment (2022 Edition).

On March 1, 2024, the Catalogue of Encouraged Industries for Hainan Free Trade Port (2024 Edition), which was jointly updated and issued by the National Development and Reform Commission (NDRC), the Ministry of Finance (MOF), and the State Administration of Taxation (SAT), came into effect, and the Catalogue of Encouraged Industries for Hainan Free Trade Port (2020 Edition) was repealed at the same time. The new catalog includes the "Industrial Structure Adjustment Guidance Catalog (2024 Edition)", "Encouragement of Foreign Investment Industry Catalog (2022 Edition)" and the new encouraged industries in Hainan Free Trade Port.

The above list shows that from January 1, 2020 to the present, VC enterprises of domestic nature have been in the encouraged industries of Hainan FTTP without any change, while VC enterprises of foreign nature are in the encouraged industries only from January 1, 2020 to December 31, 2022, and from January 1, 2023 onwards, they are no longer in the encouraged industries.

Third，Enterprises are subject to the condition of substantial operation. With respect to this condition, the Tax Bureau of Hainan Province, the Department of Finance of Hainan Province, and the Market Supervision Administration of Hainan Province issued the Announcement on Issues Relating to Substantial Operation of Enterprises in the Encouraged Industries of Hainan Free Trade Port in March 2021, and the Supplementary Announcement on Issues Relating to Substantial Operation of Enterprises in the Encouraged Industries of Hainan Free Trade Port on September 27, 2022, respectively. The basic judgment principle of substantive operation is that the actual management organization, production and operation, personnel, accounts and assets are all in the free trade port, and the specific rules will not be repeated in this article.

It can be seen that the above policy documents do not specifically provide for additional conditions that need to be filed for VC enterprises to enjoy the 15% preferential tax rate of Hainan FTTP. In other words, as long as the VC enterprises are registered in the Hainan FTZ Port, and the proportion of their main business income meets the standard, and if they meet the substantive operating conditions, they have the statutory conditions to enjoy the 15% preferential tax rate. The term of the tax incentives under Cai Shui [2020] No. 31 ends on December 31, 2024, and the Ministry of Finance and the State Administration of Taxation (SAT) issued the Notice on the Extension of the Implementation of the Preferential Policies on Enterprise Income Tax for the Hainan Free Trade Port (Cai Shui [2025] No. 3) on January 24, 2025, which stipulates that the term of implementation of the tax incentives under Cai Shui [2020] No. 31 will be extended to December 31, 2027

In addition, Article 1(3) of the Announcement on Issues Relating to Preferential Policies on Enterprise Income Tax for Hainan Free Trade Port (Announcement of Hainan Provincial Taxation Bureau No. 4 of 2020) clearly stipulates that "the policy of enterprise income tax at a reduced rate of 15% for enterprises in encouraged industries can be enjoyed according to the regulations at the time of pre-payment declaration, with the main retained backup information as follows: 1. the main business belonging to the specific items in the catalog of encouraged industries in the FTIP, and a statement that the main business revenue belonging to the catalog accounts for more than 60% of the total revenue of the enterprise; 2. a statement of the relevant circumstances under which the enterprise carries out substantial operations, including the total assets, total revenue, total number of personnel, total wages, etc. of the enterprise, and a statement of the corresponding percentage of the institutions set up in the FTIP." This provision also indicates that VC enterprises meeting the three statutory conditions are neither required to provide confirmation materials issued by the development and reform department that their main business belongs to the encouraged industries, nor are they required to provide filing materials when enjoying tax incentives.

03 What are the tax incentives linked to the VC filing system?

On November 15, 2005, the National Development and Reform Commission (NDRC) and ten other ministries and commissions issued the Interim Measures for the Administration of Venture Capital Enterprises, which came into effect on March 1, 2006. Article 3 of the Measures stipulates that "the State shall implement record management for Venture Capital Enterprises. Venture capital enterprises that have completed the filing procedure in accordance with the provisions of these Measures shall be subject to the supervision of the management department of the venture capital enterprises, and those whose investment operations are in line with the relevant regulations may enjoy policy support. Venture capital enterprises that have not completed the filing procedure in accordance with the provisions of these Measures shall not be subject to the supervision of the management department of venture capital enterprises and shall not enjoy policy support." It should be clear here that the filing system set up by the Measures as a departmental regulation is not an administrative license, non-compulsory, and is essentially a voluntary act of the enterprise, not a restriction on market access, and cannot impede the establishment and operation of the Venture Capital Enterprises.

According to the relevant provisions of the Measures, VC enterprises that meet a series of conditions, such as paid-in capital of not less than 30 million yuan, will be able to reach the threshold for filing. After completing the filing, the investment and business activities of the enterprise will be regulated and constrained by the Measures as well as the supervision of the management department, for example, the amount of investment in a single enterprise can not exceed 20% of the total capital of the enterprise (disguised as requiring that the VC enterprise's investment projects can not be fewer than five enterprises), it can not invest in guarantee and real estate business, and it submits the financial and business reports to the management department and accepts the annual inspection of the management department every year, and so on. Annual inspection, etc.

At the same time, the completed record of venture capital enterprises can enjoy three policy support. Chapter IV of the Measures, "Policy Support for Venture Capital Enterprises", contains three articles. Among them, Article 22 stipulates that "the state and local governments can set up Venture Capital Guiding Funds to support the establishment and development of Venture Capital Enterprises by participating in equity and providing financing guarantees, etc.". Specific management methods shall be formulated separately." In short, the government can provide financial support for the record of venture capital enterprises. Article 23 states, "The state shall use preferential tax policies to support the development of venture capital enterprises and guide them to increase their investment in small and medium-sized enterprises, especially small and medium-sized high-tech enterprises. Specific measures shall be formulated separately by the State Council's finance and taxation department in conjunction with relevant departments." It should be noted that after the introduction of the Measures, the state has not yet introduced specific tax incentives linked to the filing system, and the Measures actually give the Ministry of Finance and the State Administration of Taxation the power to introduce tax incentives linked to the filing system. More importantly, the core purpose of the tax incentives linked to the filing system is to guide VC enterprises to invest in SMEs, with obvious guidance and purpose. These two points are the key to determining whether a particular tax incentive policy is linked to the filing system. Article 24 stipulates that "Venture capital enterprises may realize investment withdrawal through equity listing and transfer, equity agreement transfer, and repurchase by invested enterprises. The relevant state departments shall actively promote the construction of multi-level capital market system and improve the investment exit mechanism of venture capital enterprises." That is, this article protects the right of venture capital enterprises to benefit from the orderly withdrawal of their investments.

According to Article 22 of the Measures, there are three main aspects in determining whether a tax preference policy is linked to the filing system: first, whether a particular tax preference policy is linked to the filing must be established by the Ministry of Finance and the State Administration of Taxation. In other words, no local tax authority, local government, or local government department has the right to claim that an unrelated tax incentive policy is linked to the filing system. Second, the tax incentives formulated by the Ministry of Finance and the General Administration of Taxation must specify the conditions applicable to the filing. If the tax incentives formulated by the Ministry of Finance and the General Administration of Taxation do not explicitly require the conditions for filing, then the tax incentives cannot be linked to the filing system and cannot exclude the right of non-filing VC enterprises to apply. Thirdly, the tax incentives linked to the filing system should have the characteristics of guiding venture capital enterprises to invest in small and medium-sized enterprises.

After the introduction of the Measures, the Ministry of Finance and the State Administration of Taxation (SAT) have successively introduced a number of tax incentives linked to the filing system, all of which are in line with the three features mentioned above. For example, on February 7, 2007, the Ministry of Finance and the State Administration of Taxation (SAT) issued the Circular on Relevant Tax Policies on Promoting the Development of Venture Capital Enterprises (Cai Shui [2007] No. 31), which stipulates that a VC enterprise that has taken the form of equity investment and invested in a small and medium-sized hi-tech enterprise that is not listed for more than 2 years may deduct 70% of its investment in the small and medium-sized hi-tech enterprise from the VC enterprise's taxable income, and clearly stipulates that one of the conditions for application is the completion of the filing procedure. And it clearly stipulates that one of the applicable conditions is to complete the filing procedure. This policy not only clearly stipulates that it is linked to the filing, but also carries the obvious feature of guiding the investment in small and medium-sized enterprises. Another example is Guo Shui Fa [2009] No. 87 and Cai Shui [2018] No. 55. These tax incentives all have three distinctive features, i.e., they are all investment credits against income, they all explicitly guide investment in SMEs, and they all explicitly stipulate the applicable conditions that require the completion of filing.

In practice, there are two other types of tax incentives for VC enterprises that are not investment credits against income and are not clearly characterized as guiding investment in SMEs, but still specify the applicable conditions for filing. These two types of tax incentives are Cai Shui [2019] No. 8 and three special geographic preferential policies for Beijing Zhongguancun (Cai Shui [2020] No. 63), Shanghai Pudong (Cai Shui [2021] No. 53), and Xiong'an New Area (Cai Shui [2023] No. 40).

Visible, whether this paper analyzes the Hainan free trade port tax incentives, or there are the same controversial western development tax incentives, neither guide venture capital enterprises to invest in small and medium-sized enterprise function, also did not provide a clear filing of the conditions applicable to the record, do not have the characteristics of the filing system linked with venture capital enterprises. The basic principle of modern rule of law is that the administrative organ itself should follow the principle of "no authorization is prohibited", and the administrative relative should apply the principle of "no prohibition can be". If it is necessary to link these two types of tax incentives to the filing system, then the Ministry of Finance and the State Administration of Taxation must make clear provisions or interpretations, and no other government department or tax authority can exceed its authority to interpret and enforce the law.

04 Guidelines for Venture Capital Work in Hainan Free Trade Port Beyond Boundaries

Through the previous analysis can be clearly seen, the Ministry of Finance, the State Administration of Taxation of Hainan FTTP 15% preferential tax rate does not provide for the filing of the applicable conditions, in line with the place of registration in Hainan, substantive operations, the main business income accounted for the proportion of the standard Venture Capital Enterprises, even if the filing has not been completed, but still have the right to enjoy the preferential tax policies. If the tax authorities only based on the "Interim Measures for the Administration of Venture Capital Enterprises" article 3 of the provisions of the enterprise's preferential qualifications, it is obvious that the application of the basis for error. However, a document of the Development and Reform Commission of Hainan Province has rigidly linked the tax incentives to the record, which complicates this kind of controversial issue.

On September 22, 2021, the Hainan Provincial Development and Reform Commission issued the "Guidelines for Venture Capital Investment in Hainan Free Trade Port (2021 Edition)" (Qiong Development and Reform Finance [2021] No. 709), with a question and answer system in the "Frequently Asked Questions":

"Can Venture Capital Enterprises registered in Hainan enjoy the 15% corporate income tax policy?

-- available to venture capital firms that are filed and pass an annual inspection."

This Working Guideline was followed by two new versions, the "Working Guidelines for Venture Capital Investment in Hainan Free Trade Port (2022 Version)" issued by the Hainan Provincial Development and Reform Commission on October 20, 2022, and the "Working Guidelines for Venture Capital Investment in Hainan Free Trade Port (2024 Version)" issued on March 13, 2024, both of which retained the Q&A content. Obviously, according to the understanding of the Hainan Development and Reform Commission, only those Venture Capital Enterprises that have been filed and passed the annual inspection each year can enjoy the 15% preferential tax rate, which clearly links this tax incentive to the filing system. So the question is, can the tax authorities invoke this "Working Guidelines" to determine that the Venture Capital Enterprises that have not been filed are not eligible for tax incentives? The answer is obviously no, the fundamental reason is that the Hainan Provincial Development and Reform Commission to develop the "Working Guidelines" clearly beyond its authority, can not be used as the basis for tax enforcement.

First，The Working Guidelines were formulated and issued by the Hainan Provincial Development and Reform Commission itself, and were not jointly formulated and issued with the Hainan Provincial Taxation Bureau. However, the Working Guidelines have interpreted the application of tax incentives as a matter of tax collection and management, which obviously violates the basic spirit of tax law in the Tax Collection and Management Law, and commits the mistake of overstepping the authority of tax collection and management. In other words, the tax authorities can only rely on the tax law and tax policy when implementing tax collection and management activities, and it is impossible to levy or exempt taxes on the basis of policy documents of non-tax departments, so the tax authorities can never take this Working Guideline as the basis of the legality of their own law enforcement. To take a step back, even if the tax authorities also believe that the 15% preferential tax rate should be linked to the filing system, they should find another way.

Second，The Interim Measures for the Administration of Venture Capital Enterprises have clearly defined and deployed the authority of each department. Even the National Development and Reform Commission has no right to force a certain tax incentive policy to be linked with the filing system without the consent of the Ministry of Finance and the State Administration of Taxation, and the provincial development and reform departments even have no such right.

It can be seen that the Working Guidelines formulated by Hainan Provincial Development and Reform Commission not only exceed the authority of Hainan Provincial Tax Bureau, but also conflict with the authority of the Ministry of Finance and the State Administration of Taxation. Not only that, Hainan Provincial Development and Reform Commission in the process of carrying out the annual inspection of the record of venture capital enterprises, there is also the phenomenon of "carrying private goods", the annual inspection of the record of the year 2023 as an example.

On June 7, 2023, the Development and Reform Commission of Hainan Province issued the Notice on the Annual Inspection of Venture Capital Enterprises for the Record in 2023 (Qiong Development and Reform Caijin [2023] No. 416), in which Article 5, "Application for Tax Preferences," stipulates that "Venture capital enterprises enjoying preferential policies on taxation shall comply with the management norms of the National Development and Reform Commission regarding Venture Capital Enterprises, and shall file and pass the annual inspection in accordance with the Measures, and shall also comply with the relevant provisions of the Circular on the Relevant Tax Policies for Venture Capital Enterprises and Angel Investing Individuals (Caixian [2018] No. 55) and the Circular on the Issues of Income Tax Policies for Individual Partners of Venture Capital Enterprises (Caishui [2019] No. 8). Venture capital enterprises should compare on their own whether they meet the various conditions for enjoying the tax policies. Eligible Venture Capital Enterprises may register through the "Venture Capital Filing System" to declare new information about tax incentives, fill in the "Venture Capital Enterprise Income Tax Deduction Status Form" and sign the credit commitment letter. The Commission will publicize the Venture Capital Enterprises eligible to enjoy tax incentives, and the tax registration information will be pushed to the tax department to ensure that the enterprises can enjoy the incentives in a timely manner." From the content of this notice, the Hainan Development and Reform Commission is only the Cai Shui [2018] No. 55 and Cai Shui [2019] No. 8 of the two tax preferences linked to the filing, and did not directly link the 15% preferential tax rate of the Hainan Free Trade Port to the filing, the reason for which is that the first two preferential policies are exactly the same as those analyzed in the previous section, the Ministry of Finance and the State Administration of Taxation has clearly stipulated that the first two policies should be linked to the filing system, and has not stipulated that the Hainan Free Trade Port 15% preferential tax rate policy to be linked to the filing system.

However, the Notice on the Announcement of the Results of the Annual Inspection of Venture Capital Enterprises in 2023 (Qiong Development and Reform Letter [2024] No. 3056) issued by the Development and Reform Commission of Hainan Province on November 12, 2024, stipulates that, "Enterprises that have passed the annual inspection can enjoy the benefits of the annual inspection on the basis of the Notice on the Relevant Taxation Policies for Venture Capital Enterprises and Individuals with Angel Investments (Caixian [2018] No. 55) , Notice on the Continuation of the Implementation of Income Tax Policies for Individual Partners of Venture Capital Enterprises (No. 24 of 2023), and Notice on Preferential Policies on Income Tax for Enterprises in Hainan's Free Trade Port (Cai Shui [2020] No. 31) to enjoy tax incentives." Apparently, this notice then quietly tucks the 15% preferential tax rate policy for Hainan Free Trade Port into the package of preferential policies linked to the filing system.

In short, the relevant documents and practices of the Hainan Provincial Development and Reform Commission have added objective difficulties in resolving disputes for VC enterprises facing such tax disputes. From a macro perspective, the caliber of the Hainan Development and Reform Commission's opinion on this tax incentive policy linked to the filing system is not conducive to increasing the number of local VC enterprises in Hainan with paid-in capital of up to 30 million yuan, but may instead result in a reduction in the scale of investment in Hainan. Venture capital enterprises with smaller volume tend to favor investing in local small and medium-sized enterprises (SMEs) in Hainan, which is more in line with the institutional goal of the Interim Measures for the Administration of Venture Capital Enterprises to encourage investment in SMEs. In the context of the current weakening of the investment boom and the obvious pressure of economic recovery, the relevant departments should be more flexible in utilizing the current tax incentives and support policies to cultivate investment results, protect investment confidence and promote investment growth.

Conclusion: In view of the document made by the Development and Reform Commission of Hainan Province that the preferential tax rate of 15% in Hainan FTTP is only applicable to VC enterprises that have completed the filing process, it is recommended that VC enterprises that have not filed in Hainan FTTP should be prudent in applying this preferential tax policy on their own. In case the Development and Reform Commission of Hainan Province has not yet changed the caliber of its policy, it is advisable for Venture Capital Enterprises to enjoy this preferential tax policy after fulfilling the filing procedure, so as to avoid tax disputes, which may affect the investment decision and cause property losses. In case of disputes between the relevant VC enterprises and the tax authorities over the application of the preferential tax policy, they should actively cooperate with the tax authorities, prudently respond to the disputes, make representations and defense in accordance with the law, and actively seek tax lawyers to provide professional support and legal remedies.