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Focus: Foreigners permitted to establish partnerships in China

15 December 2009

In brief: China's State Council has released the Administrative Measures Governing the Establishment of Partnership Enterprises by Foreign Enterprises or Individuals in China, permitting foreign participation in Chinese partnerships. Partner Campbell Davidson , Senior Associate Wayne Wang and Consultant Crystal Zhang report.

How does it affect you?

  • The Administrative Measures Governing the Establishment of Partnership Enterprises by Foreign Enterprises or Individuals in China (the Measures):
    • encourage foreign companies, or individuals, with advanced technology and management experience to set up partnerships in China;
    • promote the development of the modern service industry and other industries;
    • provide an alternative structure for foreign investment in China; and
    • do not require approval from the Ministry of Commerce (the MOC) for the establishment of a foreign invested partnership (FIP).
  • The Measures will come into effect on and from 1 March 2010.

Background

On 25 November 2009, China's State Council released the Measures, which were issued under the PRC Partnership Law released on 27 August 2006. After three years of anticipation, the State Council has now permitted foreign participation in Chinese partnerships.

Forms of establishment

Under the Measures, an FIP may be established by:

  • two or more foreign enterprises or individuals (foreign investors); or
  • one or more foreign investor(s), together with PRC individuals, legal persons or other organisations.

Foreign investors may also join an existing PRC domestic partnership enterprise and convert it into an FIP.

Regulatory approvals

Generally, all forms of foreign investment in China require the MOC's approval. In the previous informal discussion drafts of the Measures that the MOC and the State Council prepared, the MOC's approval was required to establish an FIP. Unexpectedly, upon the formal enactment, the Measures do not require the MOC's approval to be gained.

However, the establishment of an FIP must be registered with the State Administration of Industry and Commerce (the SAIC), which shall, following its registration of the FIP, notify the MOC branch that is at the same level. All of the partners shall delegate, or jointly authorise, a representative to lodge application documents with the SAIC, in accordance with the Administrative Measures On the Registration of Partnership Enterprises released by the State Council on 9 May 2007. In particular, the applicant must submit a statement of its compliance with the policies on foreign investment industries, which are set out in the Guiding Catalogue of Foreign Investment Industries (Amended 2007) and other relevant measures.

If the establishment of an FIP involves investment projects that must be approved by the National Development and Reform Commission (the NDRC), approval from the relevant NDRC must also be obtained under the relevant regulations.

Equity investments

Before the enactment of the Measures, a foreign invested enterprise was generally prohibited from engaging in 'equity investment' as its main business scope, unless it was a foreign invested holding company or a foreign invested venture capital investment company. A foreign invested equity investment consulting / management company may engage in investment consulting but not in 'equity investment'.

The Measures contemplate that an FIP may engage in equity investment as its main business scope. FIPs that do so must, however, also comply with the state's other laws and regulations.

Capital contribution

There is no minimum capital contribution requirement. Similarly to other foreign invested vehicles, foreign investors may, under the Measures, contribute to the registered capital of an FIP with freely convertible foreign currency or legally obtained renminbi.

Conclusion

The Measures contain only 16 articles, most of which are high-level principles. Based on the PRC's common practice of law making, more detailed implementation rules are likely to be enacted later. It remains to be seen whether, upon the enactment of more detailed implemention rules, there will be any change to the MOC's role in the approval process for the establishment of FIPs, and if there will be further regulations that will give greater certainty to an FIP's ability to make equity investments.

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