Administration Rules for Foreign-Invested Partnerships Released

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Commentary: Chris Devonshire-Ellis

Feb. 16 – China’s State Council has released the administration measures for the establishment of foreign-invested partnerships in China, as outlined in the State Administration of Industry and Commerce Circular [2010] No. 47. The measures take effect from March 1, 2010 and provide an alternative to the establishment of joint ventures and wholly foreign-owned enterprises under China’s company law. However, the measures provide only a framework for the administration of FIPs and do not yet at this moment provide fully detailed clarifications.

Of note to foreign investors interested in FIPs are the following points:

Likely intentions
The decree states that the government will encourage overseas companies and individuals to establish FIPs in China possessing “advanced technology” and “management experience.” It remains unclear how this will be determined, however in previous cases technologies are those determined by the Chinese state and are likely to be identified soon, while “management experience” has in the past been linked to professional qualifications and years of service in a particular industry, supported by a curriculum vitae with additional supporting, original notarized references of work. Interestingly, the decree does provide that partners must provide for a certificate of credit worthiness from a recognized financial institution.

This may be indicative that the focal introduction point for FIPs is in technical scientific research and development. The spin-off benefits of obtaining royalties and copyright from an investment into a FIP in terms of publishing research papers, related academic material and patents under an FIP structure would support this theory.

Restrictions
In terms of restrictions, the decree notes that the current industry restrictions as applicable to foreign direct investment into China also apply to FIPs. The decree also notes that the following types of entity are forbidden to be partners in FIPs:

  • Publicly listed companies
  • State-owned enterprises
  • Government-sponsored public welfare institutions
  • Other social organizations involved in public welfare

The decree does not determine any difference between foreign and Chinese companies in the descriptions above, indicating again that private scientific research and academic bodies are preferred, with the caveat they are not to interfere with, research or comment on aspect of China’s social model or structure.

Investment
At present, no specifics have been identified as to required capitalization of FIPs. It remains unclear as to any minimum capital requirements, or the nature of any in-kind contributions such as services, technology know-how, land use rights, IP rights may be classed as part of the investment. However, the decree does acknowledge the financing of FIPs by (freely) convertible foreign currencies, or by legitimately obtained RMB (the latter requiring tax paid proof of prior declaration of earnings). This would seem to indicate that the partners themselves could determine the nature of the investment. However, should clarifications be made later to the nature of in-kind contributions, these may well point to the type of investment that FIPs are expected to cater for.

Also of note here is the specification in the decree of “investment focused FIPs” – which may well be of pertinence to financial institutions. The decree does specify that FIPs engaging in the “business of investments” should comply with relevant national regulations. Such a statement is indicative that the government expects some FIPs to be involved in such activities. It also goes on to mention that the SAIC at the provincial or city level shall be responsible for such registrations. This is significant as the decree appears to contradict China’s Measures on Foreign Invested Venture Capital Enterprises – issued in 2003 – which states that such enterprises must be approved by the Ministry of Commerce, and must provide capital to US$10million. Yet the decree makes no such capital specification for FIPs and permits approval by the SAIC instead at a local level. Accordingly it is unclear whether the decree overrides the 2003 guidelines. If so, research houses for financial institutions may find the introduction of FIPs of significance.

Summary
The intended role of the proposed FIP in terms of its joining the number of vehicles open to foreign investors in China remains somewhat unclear. It is apparent it is not intended to be an alternative to the existing WFOE or JV structure. Such a move is unnecessary, when existing WFOE and JV rules and implementing rules are well established, understood and work well. Neither can it be seen as a move to introduce unlimited liability or limited liability partnerships to China. The Chinese government historically has not encouraged such status due to problems with domestic bankruptcy laws and it does not want to be seen to usher in an investment vehicle that may be open to abuse.

In any event, it is technically possible (albeit rare) for foreign investors to enter into an unlimited liability arrangement in China. More appropriate would be the FIP used as a legitimate research house, used to attract specific industry individuals, academics, research scientists or wealthy investors in the establishment of research institutions in China, in conjunction with their Chinese counterparts. The makeup of the FIP is well understood as regards the restrictions of types of entities that may participate, and they instead look geared to attract smaller financial, yet intellectually worthy participants with an eye on the future production of academic or financial information, products or patents to the Chinese and global markets.

Further clarification on the investment criteria both for confirming the status of individual participants, in addition to the investment guidelines will point further towards the intended usage of FIPs as a foreign investment vehicle.

Chris Devonshire-Ellis is the publisher of China Briefing and founding partner of Dezan Shira & Associates. Comments are welcome.

4 thoughts on “Administration Rules for Foreign-Invested Partnerships Released

    Carl Harris says:

    Shrewd observations. Do you have any comment on the use of FIPs for establishing law firms?

    Chris Devonshire-Ellis says:

    Thanks Carl. Yes, we do; we’ll be running a piece on the establishment of foreign law firms in China with the input of the ABA next week. – Chris

    Jane says:

    According to the regulation issued by the Ministry of Commerce in March 2009, the new set-up and subsequent amendment of foreign invested VCs and VC management companies with registered capital of no more than US$100 million are now approved by the commerce department at the provincial or city level. Therefore, in this point, the rules for FIPs and foreign invested VCs are not contradictory.

    Chris Devonshire-Ellis says:

    Thanks for the clarification Jane. Best wishes – Chris

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