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
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
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
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
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
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
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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