Name: Administrative Regulations on the Establishment of Partnership Enterprises in the PRC by Foreign Enterprises or Individuals (《外国企业或者个人在中国境内设立合伙企业管理办法》, the “Regulations”)
Issuing authority: the State Council of the PRC (“State Council”)
Effective date: 1 March 2010
Subject: foreign-invested partnerships
Under the PRC Partnership Enterprise Law, which was first promulgated in 1997, PRC entities and individuals can form partnerships, including limited partnerships, in the PRC. Whilst an amendment to the PRC Partnership Enterprise Law in 2007 left room for the State Council to permit foreign investors to establish partnership in the PRC, as a matter of practice, foreign entities and individuals have so far not been permitted to directly invest in a PRC-domiciled partnership.
The promulgation of the Regulations is an important development in a series of recent initiatives which are designed to promote private equity and venture capital investments in the PRC. For example, cities including Tianjin and Shanghai have issued local rules to promote foreign participation in private equity investments through, for example, the establishment of foreign-invested equity investment management enterprises (please refer to our China Hot Topics dated 22 August 2008 and 17 June 2009). In addition, the National Development and Reform Commission (“NDRC”) and other government bodies have also issued policies designed to promote venture capital investments. A recent example is a circular issued by the NDRC and Ministry of Finance on 29 October 2009 concerning the participation of the central government, together with local governments and private investors (including foreign investors), in the establishment of venture capital funds in a pilot program. Immediately following the issue of that circular, the first batch of 20 venture capital funds were launched in partnership with seven provincial local governments including Beijing, Shanghai, Chongqing and Shenzhen.
Whilst the promulgation of the Regulations clearly allows foreign investors to directly establish partnerships in the PRC, the regime applicable to foreign investors interested in establishing PRC private equity funds in the PRC remains fraught with uncertainty, as the Regulations allow room for further regulations on foreign-invested partnerships primarily engaging in investments, such as venture capital enterprises and private equity funds, to be issued.
Highlights
Under the Regulations, a foreign-invested partnership may either be formed solely by foreign investors or as a joint venture between foreign investors and PRC investors (whether through greenfield establishment or acquisition of interests in an existing domestic partnership).
A foreign-invested partnership is generally regulated under the PRC Partnership Enterprise Law.
The establishment of a foreign-invested partnership will be subject to the same foreign investment industrial policies as other types of foreign investment vehicles, i.e. it will fall into one of the four categories for foreign investment purposes: encouraged, permitted, restricted and prohibited, each of which is subject to different levels of scrutiny. A statement of whether the proposed partnership can satisfy the relevant requirement for foreign investment must be presented in the application process for establishment of the partnership.
Foreign investors may make capital contribution to the partnership in freely convertible foreign currencies or lawfully obtained RMB funds.
The Regulations provide for a straightforward process for the establishment of foreign-invested partnerships. Generally foreign investors are only required to register with the local branch of the State Administration of Industry and Commerce where the partnership is proposed to be located. However, if the partnership will engage in any project which is subject to government approval, such approval must also be obtained.
The Regulations provide that a foreign-invested partnership which primarily engages in investment activities will be subject to any other applicable regulations. This leaves considerable uncertainty as to how foreign-invested private equity funds will be treated.
Please contact Fang Jian (jian.fang@linklaters.com (86) 21 2891 1858) or Richard Gu (richard.gu@linklaters.com (86) 21 2891 1839) if you would like further details.
