Table of contents
Introduction
Regulatory framework
Different types of FIPE and their business scope
Capital contributions
Establishment of FIPE
Partnership’s liability with the third parties
Admission to and withdrawal from partnership
Distributions of losses and profits
Taxation of FIPE
Dissolution and Liquidation of FIPE
Introduction
On November 25, 2009, the State Council of the People’s Republic of China issued the "Administrative Measures on the Registration of Foreign-invested Partnership Enterprises", which entered into effect on March 1, 2010.
The "Measures" were issued to clarify some critical aspects to establish foreign-invested partnership enterprises in China with Chinese domestic partnership enterprises, which are provided by the amended PRC Partnership Law of 2007 (the “Provisions”).
However, even if the 2010 legislation officially opened the route for foreign investors to invest directly in a partnership enterprise in China, this new investment vehicle is still relatively unknown to many foreign investors.
FIPE does not enjoy the proper publicity in China because the government still looks askance at partnership enterprises for the same political and historical reasons of the last century.
More clearly, the partnership was the first and most common way to do business since the feudal time. From 1368 to 1911, partnerships with distributive shares were the principal form of a business entity that investors ran coal mines. At the beginning of last century, the 41% of factories were run by partnerships and 20% were sole proprietorships, but after the end of the 1950s centralization of the economy caused the partnership form to vanish for nearly thirty years. The strong label of private ownership was incompatible with China’s socialized economy during that time.
When China decided to leave that horrible isolated economic path, after having figured out it needed the rest of world to become a modern and wealthy country, the government had to choose carefully the foreign investment vehicles that could be easier controlled and monitored by the same government. JVs and WFOEs were the most suitable business forms for a rapid economic and technological growth in harmony with the Party’s aims, and in fact, we have seen an intensive legislative activity and support to these two investment vehicles over the years.
On the contrary, the Chinese government has been very cautious and cognizant of the legal development of FIPE. After slowly easing restrictions on domestic partnerships during the last fifteen years (the first modern PRC Partnership Law was promulgated on 1997), China authorized the foreign-invested partnerships through the measures of 2010.
The reason for this late decision is the new economic trend. Since 2006 the most important foreign factories-corporations, which have contributed to the extraordinary growth in China, have left China or drastically reduced their presence. China is not convenient for many types of investments anymore and the Chinese government has decided to focus on the development of domestic market for the next decades. Furthermore, China is trying to stop the hemorrhage of Chinese capitals and change the nature and quality of foreign investments.
Thus, to achieve these new goals and in response to current economic decline, the Chinese government has taken numerous measures, among which, the recent approval of FIPE.
Partnerships should be the natural vehicles for China to seek increased amounts of foreign direct investments to support the development of service industries (Article 3 of the Measures: “The state encourages foreign enterprises or individuals with advanced technologies and management experience to establish partnership enterprises within the territory of China so as to promote the development of the service industry and other industries.”).
Regulatory framework
The legal bases for the establishment of a FIPE are the PRC “Partnership Enterprise Law”(中华人民共和国合伙企业法), revised by the Standing Committee of the National People's Congress on August 27, 2006, and came into force as of June 1, 2007, and the PRC “Administrative Measures for the Establishment of Partnership Enterprises within China 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), issued by the State Council of the People’s Republic of China on November 25, 2009, and entered into force on March 1, 2010 (with minor revision in 2014).
Other very important regulations and principals are:
Decision of the State Administration for Industry and Commerce on Amending the Detailed Rules for the Implementation of the Regulation of the People's Republic of China on the Administration of Registration of Enterprise Legal Persons
the Provisions on the Administration of Registration of Foreign-Funded Partnership Enterprises
the Measures for the Administration of Registration of Sole Proprietorship Enterprises and the Measures for the Administration of Registration of Individual Industrial and Commercial Households of 2014” (国家工商行政管理总局关于修改 “中华人民共和国企业法人登记管理条例施行细则”, “外商投资合伙企业登记管理规定”,“个人独资企业登记管理办法”,“个体工商户登记管理办法” 等规章的决定)
Detailed Rules for the Implementation of the Administrative Regulation of the People’s Republic of China on the Registration of Legal Person Enterprises of 2014 (中华人民共和国企业法人登记管理条例施行细则)
Provisions on the Administration of Registration of Foreign-funded Partnership Enterprises of 2014 (外商投资合伙企业登记管理规定)
Announcement of the State Administration of Taxation on Issues concerning the Individual Income Tax on Individual Industrial and Commercial Households, Sole Proprietorship Enterprises and Partnership Enterprises of 2014 (国家税务总局关于个体工商户, 个人独资企业和合伙企业个人所得税问题的公告)
The PRC Individual Income Tax Law of 2012 (中华人民共和国个人所得税法)
The PRC Enterprise Income Tax 2007 (中华人民共和国企业所得税法)
Measures for the Administration of Individual Income Tax on Equity Transfer Income of 2014 (股权转让所得个人所得税管理办法)
Notice of the State Administration of Foreign Exchange on Issuing the Provisions on the Foreign Exchange Administration of Domestic Direct Investment of Foreign Investors and the Supporting Documents of 2013 (国家外汇管理局关于印发 “外国投资者境内直接投资外汇管理规定”及配套文件的通知)
Regulation of the People's Republic of China on Foreign Exchange Administration of 2008 (中华人民共和国外汇管理条例)
Administrative Measures for the Confirmation and Recordation of Foreign-Funded Projects of 2014 (外商投资项目核准和 备案管理办法)
Notice of the State Administration for Industry and Commerce on Doing a Good Job in the Implementation of the Administrative Measures for the Establishment of Partnership Enterprises within China by Foreign Enterprises or Individuals of 2010 (国家工商行政管理总局关于做好 “外国企业或者个人在中国境内设立合伙企业管理办法” 贯彻实施工作的通知)
The Foreign Investment Industrial Guidance Catalogue of 2015 (外商投资产业指导目录).
Foreign investors should also check the type of industry, city or zone of a city, to see if there is a specific regulation (e.g. law or accounting partnership firms, free trade zone in Shanghai or special district in Shenzhen, etc.).
Different types of FIPE and their business scope
According to article 2 of PRC Partnership Enterprise Law, the term “partnership enterprise” refers to the general partnership enterprises and limited liability partnership enterprises that are established within China by natural persons, legal persons and other organizations in accordance with the law.
It is possible to establish the following types of partnerships:
General partnership. A general partnership (普通合伙) is formed by two or more general partners who bear unlimited joint and several liabilities for the debts of the partnership.
Limited partnership. A limited partnership (有限合伙) is formed by a combination of general partners who bear unlimited joint and several liabilities for the debts of the partnership and limited partners who bear the liabilities for the partnership’s debts to the extent of their capital contributions.
Special general partnership. The article 55 of PRC Partnership Enterprise Law introduces the special general partnership. A special general partnership (特殊普通合伙) resembles a general partnership except that it must be a professional service institution offering services requiring professional knowledge and special skills. It is intended as the preferred form of organization for law and accounting firms. The structure shields co-partners from liabilities due to the willful misconduct or gross negligence of one partner or a group of partners. In fact, according to article 57 of the Provisions, “A partner or several partners shall bear unlimited liabilities or unlimited joint and several liabilities for the debts incurred to the partnership enterprise because of his (their) intentional or serious wrongful act…”.
The business scopes of a FIPE are subject to the Foreign Investment Industrial Guidance Catalogue (the “Catalogue”) and to the different industrial policies.
In fact, despite no longer prior approval, investors must submit to the registration authority an explanation for compliance with the foreign investment industrial policies, and, in some cases, the MOFCOM and SAIC approvals are both required (Article 9, Partnership Enterprise Law: “…If the business scope of a partnership enterprise contains any item which is subject to approval prior to registration under a law or administrative regulation, such business shall be subject to approval in accordance with the law and the approval document shall be submitted at the time of registration.”).
Therefore, a FIPE may not be established to invest in the “prohibited” categories under the Catalogue. The registration authority will examine the approval documents for the FIPE’s investments in “restricted” categories under the Catalogue for which prior approval is expressly required by statute. For investments in the restricted categories for which prior approval is not required by statute or other investments falling within the regulatory purview of a relevant department, the registration authority will seek the opinion of the relevant department.
In addition, according to article 3 of the Measures, “Foreign-invested partnership enterprises shall not be established in such fields indicated in the Catalogue for the Guidance of Foreign Investment Industries as forbidden categories, “limited to joint ventures”, “limited to cooperative joint ventures”, “limited to joint ventures and cooperative joint ventures”, “Chinese partner shall hold the majority of shares”, “Chinese partner shall hold the majority of shares relatively” and those with certain proportion of foreign investment required.”
Capital Contributions
Unlike other types of FIEs, there is no minimum capital requirement for an FIPE.
The partners shall subscribe their capital contributions or paid by the partners to register the partnership. A partner may make capital contributions in money, in kind, or intellectual property right, land use right or other properties, or labor services.
Where a partner intends to make capital contributions in kind, intellectual property right, land use right and other properties, of which the price should be assessed, the price may be determined by all partners through negotiation or may assessed by the a statutory assessment institution entrusted by all partners. If the value is determined by all partners through negotiations, a confirmation letter of pricing signed by all partners through negotiations shall be provided to the registration authority. If all partners decide to appoint a legal assessment institution to assess the value, a certificate of pricing through assessment shall be provided to the registration authority issued by a Chinese domestic qualified assessment institution.
Where a partner makes capital contributions by labor services, the assessment method shall be determined by all partners and shall be stated in a partnership agreement. In this case, a foreigner employment license shall be provided to the registration authority, specific procedures of which shall be governed by the relevant state provisions.
Where foreign partners make capital contribution with the Chinese currency they earned legally within the territory of China, they shall provide the relevant certificates and documents including a foreign exchange business approval certificate of capital item for reinvesting with domestic CNY profits or other legal CNY proceeds issued by the foreign exchange administration authorities.
A partner shall perform the capital contribution obligation according to the way and amount of capital contribution and the time limit for payment as stipulated in the partnership agreement.
For the capital contributions in non-monetary properties for which the formalities for the transfer of property right shall be gone through under any law or administrative regulation, the partner shall go through the said formalities.
Establishment of FIPE
As general rule, foreign-invested partnership enterprises now only need to register with the local branch of the State Administration for Industry and Commerce (SAIC), except for those investing in industries that require special approval from the relevant governmental bodies or local Ministry of Commerce (MOFCOM). In these cases, the procedures for establishing a FIPE will follow the same scheme of pre-registration approval, approval and registration for establishing of WFOEs or JVs. Otherwise, a representative or agent appointed by all partners can directly apply to the competent local AIC.
The Measures provide that an FIPE may be established solely by foreign enterprises and/or foreign individuals or between foreign investors (individuals or companies) and domestic entities or individuals (Art.2). Solely state-owned companies, state-owned enterprises, listed company, public-welfare-oriented public institution or social organizations cannot become general partners (Art.6 of the Measures and Art.3 of the Provisions).
Registration particulars of foreign-invested partnership enterprises include:
Name
Principal business premises
Executive partners
Business scope
Partnership enterprise type
Partners’ name or title, state (region) and residence, responsibility-assuming mode, amount of subscribed or actually contributed capital, time limit for contribution, modes of contribution and assessment methods
Where the partnership agreement stipulates the term of partnership, registration particulars shall include the term of partnership.
Where professional qualification certificates of partners are required for establishment of a special general partnership enterprise as specified in laws and administrative regulations, the relevant certificates shall be provided to the registration authority in accordance with provisions of the relevant laws and administrative regulations.
For applying for establishment of a foreign-invested partnership enterprise, representatives designated or proxies jointly appointed by all partners shall provide the following documents to the registration authority:
Application form for registration of establishment signed by all partners
Partnership agreement signed by all partners
Entity qualification certificates or identity certificates of natural persons of all partners
Certificate of principal business premise
Power of attorney for representatives designated or proxies entrusted by all partners
Confirmation letter of all partners for capital subscribed or actually contributed by each partner
Explanations signed by all partners for satisfying industrial policy of foreign investment
Credit reference issued by a financial institution that has business connections with the foreign partner
Power of Attorney for Service of Process executed by the foreign partner and domestic recipient of legal documents
Where establishment of foreign-invested enterprises shall be subject to approval as specified in laws, administrative regulations or provisions of the State Council, the relevant approval certificate shall be provided in addition.
Except for the cases on which the establishment of FIPE is subject to pre-registration approval, the enterprise registration organ shall, within 20 days after it accepts an application, decide whether or not to register. If it decides to register it, it shall issue to the applicant a business license. If it decides not to register it, it shall give a written reply to the applicant and make an explanation. The date of issuance of business license of a partnership enterprise is the date of establishment of the partnership enterprise. Before a partnership enterprise obtains a business license, the partners shall not engage in the partnership business in the name of a partnership enterprise.
In case of any alteration of registration particulars of a foreign-invested partnership enterprise, such partnership enterprise shall apply for registration of alteration to the original registration authority within 15 days after such alteration is decided or happens. All signatures on the relevant application documents shall be subject to the notarization of a qualified Chinese notary agency.
A FIPE is allowed to establish branches in other Chinese cities. Within 30 days after the establishment of its branch is registered, FIPE must filing formalities with the original registration authority by strength of a copy of business license of the branch attached with seal.
If registration particulars of a branch change, the governing foreign-invested enterprise shall go through filling formalities with the original registration authority within 30 days after registration of such alteration. To apply for deregistration of a branch, the foreign-invested partnership enterprise shall go through filling formalities with the original registration authority within 30 days after deregistration of the branch.
Partnership’s Liability with the Third Parties
As in other legal systems, the Chinese legislator regulates the relationships between the partnership enterprise and the third parties, protecting the rights acquired by the third parties in bona fide, when the partner(s) of a partnership enterprise act on the behalf of the enterprise, hiding his/their restrictions or absence of executive powers to the third parties.
The Provisions lays down that the restrictions of a partnership enterprise on the partners' execution of partnership affairs and their rights to represent the partnership enterprise in the face of outsiders shall not challenge any bona fide third party, otherwise a partnership enterprise will pay for its debts with all of its properties.
However, where a partner incurs any debt irrelevant to the partnership enterprise, the relevant creditor cannot offset its credit against the debt it owe to the partnership enterprise, nor may it exercise the said partner's rights in the partnership enterprise by substituting this partner.
If the partner’s own properties are insufficient to pay off its debt irrelevant to the partnership enterprise, this partner may use the proceeds, which it (he) acquires from the partnership enterprise, to pay for the debt. The creditor may also plead the people’s court to enforce the repayment of the debt by the said partner’s property share in the partnership enterprise according to the law.
When the people’s court enforces the repayment of the debt by the said partner's property share, it shall send a notice to all partners. The other partners have the preemptive right to the property share of the said partner.
If the other partners do not purchase it, nor consent to assign it to others, a withdrawal settlement shall be made for this partner in accordance with article 51 of the Provisions, or a settlement shall be made to decrease the property share of this partner correspondingly (Article 51: “When a partner withdraws from the partnership, the other partners shall, on the basis of the property status of the partnership enterprise at the time of withdrawal, make a settlement and return the property share to him. If he is liable to compensate the losses to the partnership, the amount of compensation shall be deducted from the aforesaid property share.
If there is any pending partnership affair at the time of withdrawal from partnership, the settlement shall not be made until it is finished.”).
Admission to and Withdrawal from Partnership
To admit a new partner, unless it is otherwise stipulated in the partnership agreement, the unanimous consent of all partners and a written agreement are required. The original partners are obligated to “faithfully” inform the new partners of the business operation and financial status of the original partnership enterprise.
A new partner admitted to a partnership enterprise enjoys the same rights and bears the same liabilities as the original partners. If the partnership agreement stipulates otherwise, the said agreement prevails. The new partner also bears joint and several liabilities for the debts of the partnership enterprise incurred before it is admitted to a partnership enterprise.
Where the term of operation of a partnership business has been set in the partnership agreement, a partner may, during the period of existence of the partnership, withdraw from partnership in any of the following cases:
Any cause for withdrawal from partnership as stipulated in the partnership agreement occurs
All partners agree to the withdrawal
Any cause to make the said partner difficult to remain in the partnership occurs or other partners seriously violate their obligations as stipulated in the partnership agreement.
When the term of partnership has not been stipulated in the partnership agreement, a partner may withdraw from the partnership, providing that the execution of the affairs of the partnership enterprise will not be affected, but it (he) shall inform the other partners 30 days prior to its (his) withdrawal.
Where any partner is under any of the following circumstances, the said partner shall be deemed to have withdrawn naturally from the partnership:
A natural person partner is deceased or declared deceased according to law
It (he) is insolvent
A partner as a legal person or any other organization whose business license is revoked, or who is ordered to close up for revocation, or who is declared bankrupt
A partner loses the relevant qualifications as required by law or as stipulated in the partnership agreement, or a partner’s entire property share in the partnership business has been executed by the people’s court.
Where a partner is under any of the following circumstances, a resolution may be made to remove the said partner upon the unanimous consent of the other partners:
Failing to perform the obligation to make capital contributions
Causing any loss to the partnership enterprise for intentional or serious wrongful act
Conducting any improper act in executing the partnership affairs and other causes as stipulated in the partnership agreement.
A written notice of the resolution on the removal of a partner must be sent to the person who is removed. The removal shall take effect on the date when the person who is removed receives the removal notice, and the person who is removed shall withdraw from partnership. Where the person who is removed challenges the removal resolution, it (he) is entitled to a lawsuit within 30 days after receipt of the removal notice.
Where a partner is deceased or declared deceased, the heir who enjoys the legitimate right to inherit the said partner's property share in a partnership enterprise shall, according to the stipulation of the partnership agreement or upon the unanimous consent of all partners, obtain the qualification for being a partner of the said partnership enterprise as of the date of succession.
Under any of the following circumstances, the partnership enterprise shall return the property share of the inherited partner to his heir:
The heir is unwilling to become a partner
The heir has not obtained the qualifications of a partner as required in any law or as stipulated in the partnership agreement, or any other circumstances as stipulated in the partnership agreement, under which the heir cannot become a partner.
If the heir of the said partner is a person without civil capacity or with limited civil capacity, he may, upon unanimous consent of all partners, become a limited partner in accordance with the law, and the general partnership enterprise changes into a limited partnership enterprise.
For failure of unanimous consent of all partners, the partnership enterprise shall return the property share of the inherited partner to this heir.
When a partner withdraws from the partnership, the other partners shall, on the basis of the property status of the partnership enterprise at the time of withdrawal, make a settlement and return the property share to it (him). If it (he) is liable to compensate the losses to the partnership, the amount of compensation shall be deducted from the aforesaid property share. If there is any pending partnership affair at the time of withdrawal from partnership, the settlement shall not be made until it is finished. The measures for the return of property shares of partnership enterprise to a partner who withdraws from the partnership shall be stipulated in the partnership agreement or be decided by all partners. The return of property shares may be in money or in kind.
A partner who withdraws from the partnership shall bear joint and several unlimited liabilities for the debts which have been incurred to the partnership enterprise before his withdrawal.
When a partner withdraws from the partnership, if the partnership enterprise's properties are less than its debts, he shall share the losses in accordance with Paragraph 1 of Article 33 of the Provisions (“The distribution of profits or sharing of losses of the partnership enterprise shall follow the stipulations of the partnership agreement. If it is not stipulated or not expressly stipulated in the partnership agreement, a decision shall be made by the partners through negotiation. In case the negotiations fail, the distribution of profits or sharing of losses shall be made in proportion to the actual capital contributions made by the partners. If it is unable to determine the proportions of capital contributions, the profits or losses shall be distributed or shared equally by the partners. It shall not be stipulated in any partnership agreement that all profits will be distributed to some of the partners or that some partners will bear all losses.”).
Distributions of losses and profits
The default distribution scheme of profits or losses follows the proportion to capital contributions made by the partners.
However, the distribution scheme may follow an informal negotiated agreement or abide by scheme adopted in the partnership agreement.
If the proportions of capital contributions cannot be discerned, then the profits or losses will be distributed equally by the partners. The partnership agreement may not distribute all losses or all profits to just one or a group of partners within the partnership.
Taxation of FIPE
A Foreign-invested partnership enterprise is not a taxable entity in itself.
According to article 6 of the Provisions, the partners pay their respective income tax for the production and business operation incomes and other incomes of a partnership enterprise.
This rule is confirmed by the article 64 of the Measures, which states that FIPEs must go through formalities for foreign exchange, tax, customs, in accordance with the law.
Thus, the corporate partners and individual partners are subject to corporate income tax and individual income tax respectively on their allocated income.
Dissolution and Liquidation of FIPE
A partnership enterprise can be dissolved under any of the following circumstances:
The term of partnership expires and the partners decide not to operate it any longer
Any of the dissolution causes as stipulated in the partnership agreement occurs
All partners make a decision to dissolve it
30 days have lapsed since the number of partners fails to reach the quorum
The partnership aim as stipulated in the partnership agreement has been realized or is unable to be realized
Its business license is revoked, or it is ordered to close up or to be revoked, or other reasons as provided for by any law or administrative regulation.
The liquidators of a FIPE may be:
all the partners
one or, several partners or third persons upon consent of more than half of all partners
liquidators designed by people’s court through an application of the partners within 15 days after the occurrence of the cause for the dissolution of the partnership enterprise.
The liquidator(s) shall handle the following affairs during the process of liquidation:
To sort out the properties of the partnership enterprise, and prepare the balance sheets and the property list of the said business
To handle the pending affairs of the partnership enterprise that are related to the liquidation
To pay up taxes payable
To settle credits and debts
To handle the remaining properties after the partnership enterprise repays its debts, and to participate in lawsuits or arbitrations on behalf of the partnership enterprise.
The liquidators must, within 10 days after a decision of dissolution is made, inform the creditors of the relevant matters and publish an announcement on a newspaper within 60 days.
Creditors have to declare their credits to the liquidators, within 30 days from the day when it receives a notice or within 45 days from the announcement date if it fails to receive a notice. The liquidators record the credits.
During the process of liquidation, the partnership enterprise still exists but it shall not carry out any business activities irrelevant to the liquidation.
After paying off the liquidation expenses, wages of employees, social insurance premiums and legal indemnities, the outstanding taxes and the debts with the properties of the partnership enterprise, the residual properties may be distributed.
After the liquidation is ended, the liquidators shall prepare a liquidation report. Within 15 days after the liquidation report is affixed with the signatures and seals of all partners, it shall be submitted to the enterprise registration organ for deregistration of the partnership enterprise.
After the deregistration of a partnership enterprise, the former general partners shall still bear joint and several liabilities for the debts incurred during the existence period of the partnership enterprise.
Where a partnership enterprise is unable to meet its mature debts, the creditors may apply to the people's court for bankruptcy liquidation or may demand the general partners to make repayments.
Where a partnership enterprise is declared bankrupt, the general partners shall still bear joint and several liabilities for the debts of the partnership enterprise.
A foreign-invested partnership enterprise terminates upon registration of cancellation by the registration authority.
For setting up a FIPE in China, please visit our China Company Formation page
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