A Tibetan Prefecture Offering Generous Tax Breaks To Attract Investors, Tax Revenues Soaring

The government of Shannan prefecture in Tibet is offering generous tax breaks and other perks to make itself attractive to private equity funds and investment companies, and the move appears to be producing stunning results: In the first half of this year tax revenues for the prefecture soared 110 percent.

The move is part of China’s push to develop the Tibetan economy, while establishing firmer control over it, according to the Financial Times.

Shannan lies between Lhasa, the capital city of the Chinese province, and Bhutan, a Buddhist kingdom to the south. The prefecture, known as Lhoka in the Tibetan language, is some 3,600 meters (11,808 feet) above sea level at the foot of the Himalayas.

More than 90 percent of the 300,000 people living in Shannan are of Tibetan ethnicity. The companies that have been lured by tax breaks to the prefecture are almost entirely managed by Han Chinese, consistent with the government’s strategy of encouraging Han to populate areas inhabited by the country’s minority groups.

The corporate tax rate for investors in Shannan has been set at just 14 percent, much lower than China's norm of 25 percent. In addition, companies that pay more than five million yuan ($820,000) in taxes can have as much as 40 percent of the taxes they pay returned to them.

Tibet has also introduced a flat income tax of 20 percent for some partners of private equity firms, a large discount from the national rate, where those in the highest earnings bracket pay 45 percent income tax. Also, unlike other regions in China, the Tibetan government does not require funds registered in Tibet to invest in local firms.

“Many places throughout China, especially big cities like Beijing and Shanghai, have been offering preferential policies to private equity firms,” said Wang Jinghe, a lawyer with Dacheng Law Offices in Shanghai, according to the Financial Times. “But over the past year, lots more investors have been mentioning Tibet and talking about moving there.”

Foreign private equity firms with funds in China should theoretically be allowed to be based in Tibet, according to Wang, but he had not heard of any actual instances – foreign visitors need special permits to enter the province, and these permits can be difficult to obtain.

Domestic companies, similarly, have been slow to land in Tibet. The Chinese research and advisory firm did not have a record of Chinese private equity funds establishing operations in Tibet until last year, when three registered there. This year’s figures are not yet available, but anecdotal evidence points to a growing domestic flow towards Tibet.

At the beginning of the year, Dingxin Growth Fund established reputedly the biggest private equity fund to date in Tibet, a 400 million yuan vehicle. The firm’s mandate, however, is to invest in properties in other regions of China.

Tibet is also emerging as a tax haven for investors who want to limit taxes when selling off shares. Conant Optical, a Chinese eyewear maker listed on China’s venture capital stock exchange, announced on Wednesday that its founder’s investment company has moved from Shanghai to Shannan, and reduced its overall stake in Conant.

The government of Shannan reported that tax revenues for the first half of 2013 reached 726 million yuan, a 110 percent year-on-year increase, according to the Financial Times.