The State Council issued the Measures on Administration of Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals (the "Measures") on 2 December 2009. The Measures, effective from 1 March 2010, will allow foreign investors to establish partnerships in China.

According to the Measures, more than two foreign enterprises or individuals can establish a foreign invested partnership ("FIP") solely or together with Chinese individuals, legal persons or other organisations in China. Foreign investors to an FIP are only allowed to contribute capital in the form of cash, either foreign currency or Renminbi.

New investment vehicle for foreign investors and simplified registration procedure

The issue of the Measures provides a new investment vehicle to foreign investors who may, after 1 March 2010, choose to establish business in China through a partnership enterprise, in addition to a Sino-foreign joint venture ("JV") or a wholly foreign owned enterprise ("WFOE").

Compared with the procedures for establishing a Sino-foreign JV or a WFOE in China, the Measures take a different, more convenient and flexible approach for the establishment of an FIP. The foreign investors who act as partners of the FIP do not need to apply to the Ministry of Commerce for approval prior to registration with Administration of Industry and Commerce ("AIC"). Instead, they shall directly apply to the competent AIC for the establishment of an FIP.

However, an FIP is still subject to foreign investment industrial policies, including the Foreign Investment Industry Catalogue. The foreign investors are required to submit an explanatory document on compliance with foreign investment industrial policies to the competent AIC, with other application documents.

Furthermore, the establishment of an FIP is also subject to approval by National Development and Reform Commission and other approval authorities where necessary.

Possibility for foreign VC/PE firms to adopt a more direct approach

Prior to the Measures being effective, in order to adopt the limited partnership as the form of Renminbi fund, foreign investors should set up a foreign invested management or consulting company first and use such foreign invested company acting as a general partner to establish a domestic partnership enterprise in accordance with the PRC Partnership Enterprise Law.

The FIP model provides international VC/PE firms with the possibility of adopting limited partnership as the form of Renminbi fund directly. However, there is no clear position if or not partnership with the main business of investment, such as VC and PE funds can be set up as FIP in the Measures. The press release made by the Legal Affairs Office of State Council shows that detailed rules in this regard will be issued in the near future.

Advantage of the FIP from tax perspective

The Measures generally stipulated that the tax affairs of the FIP shall be dealt with in accordance with relevant laws and regulations.

According to the PRC Partnership Enterprise Law and Notice on Issues related to Income Tax of Partners of the Partnership Enterprises, only the partners of an FIP are taxpayers who shall pay individual income tax (if individual partner) or enterprise income tax (if enterprise partner) for the income of the FIP. The FIP itself does not need to pay enterprise income tax, which is one of the advantages of an FIP compared with other existing investment vehicles.

It also can be expected that the Chinese State Administration of Taxation will issue more specific tax circulars in the following months which may cover the calculation of taxable income of foreign partners, withholding tax on the income of foreign investors derived from the FIP when remitted out of China and so on.

In conclusion, the Measures give FIP legal status under Chinese law and provide a new investment vehicle for foreign investors. Nonetheless, it is only a preliminary and general regulation on FIP and more detailed rules and regulations on various respects are expected, including but not limited to foreign exchange, tax issues and application for VC/PE business.

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The original publication date for this article was 22/12/2009.