China: Recent PRC Partnership Law Amendments: Domestic Changes Significant—Little Immediate Impact Seen On Foreign Private Equity Investment

Last Updated: 12 July 2007
Article by Paul D. McKenzie and Steven L. Toronto

Taking an important step towards a more pro-investment corporate law, China amended its Partnership Enterprise Law ("Partnership Law") on August 27, 2006. The amended Partnership Law, which took effect on June 1, 2007, significantly alters existing partnership rules and principles established under the original Partnership Law enacted a decade earlier. While the Partnership Law governs domestic partnership enterprises, based on Article 108 of the Partnership Law, the PRC government has specifically contemplated foreign investment in PRC partnerships. In accordance with Article 108, the Ministry of Commerce ("MOFCOM") drafted the Foreign Investment Partnership Regulations ("FIPR") and circulated it to other governmental agencies for comments on January 25, 2007. The FIPR is currently still in its drafting stage, but we can expect to see the new regulation promulgated soon. As with any new PRC regulation, there are a number of questions raised by the draft. The FIPR and the Partnership Law may in the future provide foreign investors with an alternative structure through which they may raise funds for investment into PRC enterprises. Many uncertainties have been raised about certain provisions incompatible with the operation of foreign private equity funds. These initial concerns seem to indicate that, if the FIPR is promulgated as drafted, the immediate impact of the FIPR on foreign private equity investment will be negligible. This update provides a brief overview of the significant amendments to the Partnership Law and the provisions of the draft FIPR.

Significant Changes to the Old Partnership Law

The significant changes made by the amended Partnership Law include:

  • Limited Liability Partnership – Under the old Partnership Law, only unlimited liability partnerships were permissible. Such structures, which are similar to general partnerships in the U.S., expose the partners of a partnership to joint and several liability for the liabilities of the partnership. The amended Partnership Law now permits investors to establish limited liability partnerships ("LLP"). An LLP is similar to a limited partnership in the U.S. It provides for a class of partners with limited liability, but also requires a general partner. The general partner is liable to the full extent of the debts of the partnership, while the limited liability partners’ liabilities to third parties and to the other partners are limited to the extent of their capital contributions to the partnership.
  • Legal Person Partners – The old Partnership Law required partners to a partnership to be individuals. The amended Partnership Law allows both legal persons and individuals to invest in partnerships. However, it is unclear whether non-individual legal persons such as PRC or foreign corporations with limited liability may be a general partner of a PRC LLP.
  • Bankruptcy – It was previously unclear whether a partnership could be forced into bankruptcy under the old Partnership Law. The amended Partnership Law, however, gives creditors of LLPs the option, when the partnership is unable to meet its obligations when due, either to apply to the people’s court for bankruptcy liquidation, or to claim directly against the general partners.
  • Pass-through Taxation – Article 6 of the amended Partnership Law expressly exempts partnerships from paying income tax, taxing the income to partners on a pass-through basis.

Foreign Invested Partnerships

The amended Partnership Law only applies to domestic partnerships. According to Article 108 of the amended Partnership Law, administrative measures regulating foreign invested partnerships will be promulgated by the State Council. In furtherance of Article 108, MOFCOM drafted the Foreign Investment Partnership Regulations ("FIPR") and circulated it to other governmental agencies for comments on January 25, 2007. It is anticipated that the FIPR will be promulgated soon.

The bottom line for foreign investors is that the FIPR raise more questions than answers about the viability and advisability of establishing a foreign-invested partnership ("FIP") pursuant to the Partnership Law and the FIPR. For the most part, the existing requirements for foreign investment enterprises ("FIE") will also apply to FIPs. However, the FIPR are silent on many issues and indeed, the draft FIPR include several material departures from the Partnership Law governing domestic investors in partnerships. Set forth below is a brief summary of the high-and low-lights of the new regulations.

  • According to Article 2 of the draft FIPR, MOFCOM will permit the establishment of FIPs, and Chinese individuals and other legal persons are expressly permitted to cooperate with foreign investors to establish FIPs.
  • In a departure from Article 16 of the Partnership Law, unlike domestic investors, foreign investors are not permitted to make capital contributions by performing services for partnership.
  • Unlike a domestic partnership in which the investors may contribute capital in accordance with a schedule agreed to and set forth in the partnership agreement, foreign investors in an FIP must contribute capital in a lump sum within 90 days of the approval of the FIP.
  • Foreign general liability partners are required to file a list of their major assets with the PRC approval and registration authorities and must update such filing whenever there are material changes to such assets.
  • The FIPR are silent on a number of important matters that will be of concern to foreign private equity investors, including:

    • Whether a foreign limited liability company may be a general partner of an FIP;
    • Whether an FIP is permitted to be an investment vehicle, with no project scope other than to invest in PRC domestic enterprises;
    • Whether an FIP will require additional approvals for each investment transaction as if the investment were being made by a foreign person, or whether the investments made by the FIP will be viewed in a manner similar to a Foreign Invested Venture Capital Enterprise (where a post-investment filing is all that is required).
    • Whether and how foreign exchange and cash and in-kind distributions will be handled in respect of foreign investors in FIPs. May foreign limited partners or general partners make contributions in U.S. dollars and receive distributions in U.S. dollars? May foreign limited partners receive distributions of securities of portfolio companies that are listed on a domestic stock exchange?

Implications of the Amended Partnership Law on Foreign VC and PE Investment

At the moment, the Partnership Law will have little to no impact on foreign investment by private equity investors in the PRC. First and foremost, the draft FIPR have yet to be promulgated, so there has been no official implementation of Article 108 of the Partnership Law contemplating foreign investment in a PRC partnership enterprise. In addition, as described above, the current FIPR and Partnership Law either are silent on key elements necessary for a foreign investor to make an informed decision about whether an FIP is a suitable investment vehicle, or the provisions that apply to foreign private equity investors are inconsistent with the way private equity funds typically operate. For example, it is unclear whether the general partner of a limited liability partnership may be a limited liability company. Virtually every general partner of a foreign limited partnership operating as a private equity fund is, in itself, a limited liability company of one form or another. In addition, the draft FIPR require foreign limited partners to fund 100% of their capital contributions within ninety days of approval of the establishment of the partnership. This requirement is completely inconsistent with the way private equity funds operate, and would make the FIP a distinctly undesirable vehicle for private equity fundraising. Finally, and perhaps most importantly, it is unclear whether an FIP is permitted to operate as an investment vehicle and whether it would require additional MOFCOM approvals for each portfolio investment.

Unless the draft FIPR are significantly amended and clarified to address the foregoing issues, the new Partnership Law and draft FIPR are at best a step in the right direction for foreign investors. For domestic investors, the new Partnership Law represents a significant development in the evolution of corporate law in that it seemingly provides for the type of flexible partnership structure with limited liability features that is well- developed in other jurisdictions such as the United States, Japan, and the Cayman Islands. It remains to be seen whether these benefits may be extended to foreign investors.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Paul D. McKenzie
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions