This content is from: Local Insights

Foreign investment in China

Jem Li Helen Zhang

The Administrative Measures for Foreign Enterprises and Individuals to Establish Partnership Enterprises in China (the Measures), promulgated by China's State Council on December 2 2009 became effective on March 1 2010. The Measures open up partnership as a structure for foreign investment in China. Beginning March 1 2010, non-Chinese entities and individuals, alone or with Chinese individuals, legal persons and other organizations, are allowed to set up foreign invested partnerships (Fips).

The Measures are legally significant and have practical implications, as follows:

  • The Measures provide a new vehicle for non-Chinese investment in China, in addition to Joint Ventures (JVs) and Wholly Foreign Owned Enterprises (WFOEs), the two primary business forms used by non-Chinese investors in China before the Measures were promulgated.
  • A FIP is established by registering with the State Administration of Industry and Commerce (Saic), without the approval of the PRC Ministry of Commerce (Mofcom) or its local counterparts.
  • Capital contributions to a Fip are flexible. Capital contributions in the form of services are allowed, a significant change compared to capital contributions to a JV or a WFOE.
  • Capital contributions to JVs and WFOEs must be made within time limits specified by law. There is no specified time for capital contributions to a Fip.
  • The management structure of Fips is flexible. The Measures specifically provide that Fips are governed by their partnership agreements.
  • Both non-Chinese and Chinese partners in a Fip enjoy enterprise pass-through tax treatment, avoiding double taxation.

Due to the tax benefit and the other features, the Measures should be of great interest to a wide range of Chinese economic sectors that are attractive to non-Chinese investors. Of particular interest should be the private equity (PE)/venture capital (VC) sectors.

Although investment-oriented funds such as PE/VC funds are not carved out from the Measures, article fourteen of the Measures provides that, for Fips with investment in other entities as their primary purpose, Chinese government regulations in the future prevail. A pipeline of detailed regulations supplementing and clarifying the Measures as applicable to Fips are expected soon. These should add certainty to use of Fips for PE/VC funds.

Jem Li and Helen Zhang

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