Tax Bureaus Try Heavy Levy on PE Investments

When a private equity firm enthusiastically invests in a hot Chinese company these days, the local tax man can feel his own temperature rise.

PE firms often buy targeted company shares at premium prices, pumping up balance sheets and benefiting major shareholders in ways that largely go untaxed.

Tax authorities in provinces, cities and other jurisdictions started paying closer attention to PE deals and the power to demand a slice of earnings after the central government enacted the Enterprise Income Tax Law in 2008. The law gave each regional tax bureau the right to tax earnings from "unjustifiable business" operations, and lets them define "unjustifiable."