Tax And Red Tape Thwart Private Equity Deals In Asia

by Mary Swire, Tax-News.com, Hong Kong

21 July 2005

New tax regulations combined with bureacracy and intensified competition have forced down the number of private equity deals in China and Japan in the first half of the year, it has been reported.

According to research by the Asian Venture Capital Journal, the volume of private equity deals in Japan more than halved in the first six months of 2005 to $1.6 billion from $3.5 billion in the same period last year, whilst, in China, the number of deals has fallen by 44% to $659 million in the first half compared to 2004.

The slowdown in the number of private equity deals in China and Japan has contributed to a 32% decline in the total number of deals in Asia as a whole, the figures indicated.

Experts have attributed the decline in the volume of deals to recently-introduced regulatory measures in China which restrict the use of offshore entities in Chinese private equity deals. The use of offshore firms by both domestic and foreign investors in China must be approved by the State Administration of Foreign Exchange before going ahead.

Meanwhile, in Japan, private equity deals have stalled after the introduction of a new tax on foreign buy-out groups, dubbed the 'Shinsei tax', which is thought to have come in response to profits made by US private equity firm Ripplewood from the listing of Shinsei Bank. Ripplewood did not pay capital gains tax on the transaction in Japan, which led to much public outrage over alleged abuse of the domestic tax system by foreign firms.

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