- New Form of Foreign Investment -- Foreign-invested Partnership ("FIP")
- December 21, 2009
- Law Firm: Troutman Sanders LLP - Atlanta Office
Released on December 2, 2009, and effective on March 1, 2010
The State Council has published the long awaited Administrative Measures on the Establishment of Partnership Enterprises by Foreign Enterprises or Individuals ("Measures") on December 2, 2009, which are widely recognized as a new form of doing business in China and a new step to encourage foreign investment. These Measures will take effect on March 1, 2010.
China foreign investment laws have been developing for 30 years, but despite the gradual opening up of its domestic market to foreign investors, the forms of foreign investment have long been restricted to the traditional "Three Forms" of FIE (Sino-foreign equity joint venture company, Sino-foreign cooperative joint venture company and wholly foreign-owned enterprise). Although the administrative rules for FIEs have been revised several times to provide foreign investors more flexible structures, and there are several supplementary forms for doing business in China (such as processing and compensation trades, representative offices, etc.), the options for foreign investors have been very limited. For example, with the development of private equity ("PE") investments in China, many foreign PE firms are trying to find a suitable way to enter into Chinese market and establish RMB funds, but the current FIE legal regime cannot provide them an acceptable structure, while the domestic PE firms may easily use general/limited partnership and trust plan structures to raise funds in China.
Therefore, the Measures may show that China's government intends to keep encouraging foreign investment and further reduce current restrictions. The new Measures contain only 16 clauses but provide wide rooms for foreign investors to form FIPs in China. Foreign investors may form wholly-owned FIPs or Sino-foreign owned FIPs, or join existing domestic partnerships which will be converted into FIPs. Most of the provisions of the PRC Partnership Law ("Law") will also apply to FIPs, which means that FIPs can enjoy the same treatment as domestic partnerships. Moreover, unlike FIEs, the incorporation, amendment registration and termination of the foreign-invested partnerships will only be governed by the State Administration of Industry and Commerce ("SAIC") and its local counterparts without approvals from the Ministry of Commerce ("MOFCOM"), which is significantly different from that of FIEs and simplifies investment procedures.
Although the Measures are very broad, and many issues, such as accounting, tax, foreign exchange, customs and PE investment requirements, are still unclear and will need to be clarified by subsequent legislation or in practice in the future, the Measures themselves are a sign of great potential. We believe FIPs will become a popular form of foreign investment and mark the continuous opening of China's markets.