A New Corporate Structure in China Partnerships: A New Form of Investment for Foreign Enterprises and Individuals
Measures for the Administration on the Establishment of Partnership Business by Foreign Enterprises or Individuals in China (the “Measures”) shall come into effect as of March 1, 2010.
Currently, foreign investors start business in China primarily in the form of Equity Joint Ventures, Cooperative Joint Ventures, Wholly Foreign Owned Enterprises ("WFOE") and Representative Offices. However, the Measures create a new structure - foreign invested partnerships (“FIP”) for foreign investors to invest and operate in China.
The Measures indicate that FIPs shall be governed by the Partnership Enterprise Law, issued as a general rule over partnership enterprises in 2007, and shall be regulated by the Foreign Investment Industry Catalogue.
The features of the new structure reflected in the Measures are as follows:
- Regarding this form of partnership, the investor may act as a general partner or as a limited partner of a limited partnership;
- Regarding the registration authorities, an application for a FIP’s establishment shall be directly submitted to the State Administration of Industry and Commence and its local branch for approval (“MOFCOM”) will only be notified after the registration is completed. Historically, the application for the establishment of the foreign invested company shall be approved by MOFCOM before registration. Definitely, the Measures take a different approach for FIPs.
- Regarding the registered capital, the Measures are silent on the minimum registered capital, so it is assumed that the capital contribution and changes of capital may be stipulated in the partnership contract;
- Regarding the liability of the investors, according to the PRC Partnership Law, the general partners of this form of enterprises shall bear unlimited liabilities to the debts of the enterprises, which is entirely different from the limited liabilities of other foreign invested enterprises. The “limited partners” of the Partnership will only be liability up to the amount of their capital contributions.
- Regarding the tax, foreign partnership enterprises are immunized from the corporate income tax. Each partner of a partnership is liable for tax on its share of income of the partnership, regardless of whether such profits are distributed.
The Measures create a new legal form which provides flexibility and efficiency for them to set up businesses in China. However, the Measures only stipulate the basic rules for FIP’s establishment registration, changes, registration, dissolution, financial accounting, taxes, foreign exchange, customs, etc., and these rules still remain unclear and need further clarification. Therefore, it is expected that the implementation of the Measures and other relevant legislation shall be followed by other supplementary rules.
The Promulgation of New Merger-Control Regulations (Ref. Anti-Monopoly Law)
The Ministry of Commerce (“MOFCOM”) issued the Measures for the Reporting of Concentrations of Business Operators
(“Reporting Measures”) on November 21, 2009 and Measures for the Review of Concentrations of Business Operators
(“Review Measures”) on November 24, 2009. Both of the regulations related to Anti-Monopoly Law will take effect on January 1, 2010.
The Reporting Measures mainly the following respects:
- The definition of “Concentrations of Business Operators”;
- The definition of “Turnover of the Business Operators” and the specific calculation methods of the turnover under different circumstances;
- The list of documents for the reporting.
The Review Measures mainly regulate the issues as follows:
- The MOFCOM is in charge of reviewing the reporting of concentrations of business operators;
- The hearings can be held during the review and the regulations & procedures of the hearings are also stipulated;
- The review is divided into two parts: preliminary review and further review;
a. During the preliminary review, contradict the review decision made by MOFCOM;
b. During the further review, the business operators can propose some restrictions to themselves on concentration.
Though the two regulations clarify the issues on the concentration reporting and review, they also create increased uncertainty. The previous draft of Reporting Measures defined what constitutes “acquisition of control”, but it was entirely removed from the Reporting Measures, which means that operators need to consult with MOFCOM before going ahead with many deals. The Reporting Measures are also missing guidance on joint ventures, including if and when joint ventures constitute concentrations under Anti-Monopoly Law.
Without the definition of those formal rules, it seems that MOFCOM has made on incomplete progress. The recent changes seem to also give MOFCOM a broader discretionary power, which will most probably increase uncertainty.
Notice on Interpretation and Determination of The Concept of "Beneficial Owner" for The Application of Tax Treaties
The State Administration of Taxation issued the “Notice on Interpretation and Determination of Beneficial Owner under Tax Treaties” (the "Notice").
The Notice intends to regulate the acts of foreign companies preventing them from taking advantage of the “double taxation arrangements” signed by China.
The following are the main contents of the Notice:
1. According to the Notice, a "beneficial owner" is a person who has owned and controlled the income or the rights and assets which generate the income. A beneficial owner can be an individual or a company, and is basically the one who carries out the substantial business.
An agent or a conduit company is not a beneficial owner. The "conduit company" is set up for the purpose of avoidance or reduction of tax, the transfer or accumulation of profit.
2. The Notice also lists seven factors, which may lead to determine the existence of a “conduit company”. The following factors deserve especial mention:
a. The applicant has no or almost no business activities other than holding the rights or assets which generate the income;
b. If the applicant is a company, which assets, business scope, and personnel are small, and does not match the amount of income;
c. The applicant has no or almost no right to control or dispose of the income or the rights and assets which generate the income, and also assumes no or little risk.
The promulgation of the Notice indicates that Chinese government has taken actions to crack down on treaty shopping by nonresident enterprises. This Notice makes more difficult for multinational companies to enjoy the benefits established in the tax treaties between China and other countries and regions.
In any case, it must be noticed that theoretically the other parties of the tax treaties should also agree with the Notice and the relevant regulations for them to become fully applicable to the relevant parties.
Establishment of Tianjin Climate Exchange
On September 25 2008, Tianjin Climate Exchange (TCX) was set up in the Tianjin Binhai New Area, which is a joint venture between Chicago Climate Exchange (CCX), the municipal government of Tianjin and the asset management unit of Petro China.
The establishment of TCX is regarded as China's first comprehensive platform for trading emissions under the Clean Development Mechanism. The real exchange is expected to be started up before the end of this year, which means that enterprises can buy and sell legal emissions rights on this platform in a similar manner as they would trade securities in a stock exchange. By means of this kind of market and financial measures, the “Clean Development Mechanism” (CDM) is strengthened, which will definitely promote environmental protection and emission reduction in China.
TCX concentrates on the trading and services of primary pollutants’ emissions such as sulphur dioxide and carbon dioxide as its business scope. Meanwhile, TCX shall adopt a membership system. The membership is classified into emitters, credits providers and bidders.
Measures on enhancing the supervision of construction industries in China
In order to regulate the development of the construction industries and remedy the problems during the implementation of the recent RMB4 trillion government stimulus package, the general office of the Central Committee of the Communist Party of China and the State Council jointly issued "Zhong Banfa" Document No. 27 on July 9th, 2009, which stated the harms and specific measures to settle the problems mentioned.
The main problems identified are as follows:
- Money-for-power deals and commercial bribery exist generally;
- Some officials in local governments abuse powers to operate approval and give priorities to individuals and entities illegally;
- Some intermediate agencies provide service by violating the corresponding laws and regulations;
- The funds for construction from the central government are embezzled for non-construction use;
- The quality of the some construction facilities can not satisfy the criteria.
The specific measures mandated are as follows:
- Local government should practice self-examination to eliminate the corruption and protect the normal market rules in the procedure of approval, land sales, tending and bid of construction projects;
- A more transparent construction project information system should be established to prevent officials from abusing their powers to acquire personal gain;
- The authorities should supervise the operation of the intermediate agencies more strictly and carefully;
- The superior government should inspect the use of stimulus fund and qualities of the facilities more strictly;
- More relating laws and regulations should be drafted and issued for the implementation of this project.
Meanwhile, foreign-invested design and construction companies are also required to have the up-to-date qualifications and licenses in line with their business scope in China. In other words, these kinds of foreign companies can not be immune from the supervision in the light of construction regulations
Judicial Interpretation to the Implementation of New Insurance Law
The interpretation stipulates that the effect of the new "Insurance Law" is, in principle, non-retroactive. The disputes before the enforcement of the new insurance law will apply the law which was applicable at the time of the dispute except other provisions of the interpretation. However, new disputes that take place after the implementation of the new insurance law will apply new insurance law.
As an example of the relevance of this, we can mention the new provisions on “Insurer’s termination rights” which in this new law have been clearly limited. Therefore, all existing contracts could be changed to follow these new provisions thereby improving the contractual position of the insured party. In other words, it will be very important to review all of the insurance agreements in light of the new insurance law, because any future dispute will apply the new insurance law.
Notice of the Implementation of Royalty Provisions in Tax Treaty
In order to facilitate the avoidance of double taxation relating to the implementation of tax provisions, the State Administration of Taxation recently issued the "Notice of the implementation of royalty provisions in tax treaty "(the notice), which will come into effect on October 1st, according to agreements of avoiding the double taxation between China and foreign countries.
The main points of the notice are as follows:
1.- If the definition of royalty in the corresponding tax treaty explicitly includes the funds for use of industrial, commercial and scientific equipment, the profit of the royalties shall be regulated by the royalty provisions in such tax treaty. If the tax rate in the tax treaty is lower than the rate in the relating tax law of PRC, the former shall be applied.
2.- In the service agreement, if the provider uses some know-how and technologies in the process of service but does not transfer or license them, this kind of service agreement does not belong to the scope of royalty.
3.- If the staffs from technology licensor charge the service fee for providing the support and instruction in the process of transfer or license of know-how and technologies, the service fee will be regarded as the royalty and regulated by the royalty provisions in the tax treaty. However, if the service corresponds to a contribution to an existing entity, the profit from service shall apply the provisions of business profit in the tax treaty.
4.- The following income or profit shall be considered as labor income rather than royalty:
1) The income of the service after selling in the trade of goods;
2) The income of the service provided by the seller to the buyer during the guarantee period;
3) The income of the service from the professional organizations such as engineering, management and consulting companies;
4) Other similar incomes regulated by the State Administration of Taxation.
The announcement of the notice specifies the definition and the implementation of the royalty provisions in the tax treaty, which will make the procedures relating to the taxation more transparent and efficient.
Foreign Exchange Administrative Measures Governing Overseas Direct Investment by Domestic Institutions
In order to encourage and regulate the overseas investment by domestic institutions, the State Administration of Foreign Exchange (SAFE) has issued the provisions, which will be effective on August 1st, 2009.
The main points of the provisions are as follows?
- The provisions expand the sources of foreign exchange by means of adding foreign exchange obtained in PRC, currency loans, payments in kind, intangible assets and others approved by SAFE for overseas investment.
- Institutions can keep the profits obtained from investments abroad for further direct investment or remit them back to China. For the latter way, institutions have an option to keep them in currency accounts or convert into RMB.
- Domestic transfer of shares in overseas investments should be operated in RMB.
Provisions will allow foreign exchange management for foreign direct investment in a more standardized and systematic manner, in favor of domestic institutions grasping the opportunity to improve the efficiency of foreign direct investment. At the same time, these new regulations are also conducive to improve the statistical monitoring and promoting China's basic balance of international payments.
CBRC New Rules on Fixed Assets Loan & Project Finance
1) Guidelines for Project Finance Business, [2009] No.71
2) Provisional Measures on the Administration of Fixed Assets Loans, CBRC Order [2009] No.2
In order to regulate the fixed assets loans and project finance business of the commercial banks, China Banking Regulatory Commission (“CBRC”) released the Guidelines for Project Finance Business on July 18, 2009, and the Provisional Measures on the Administration of Fixed Assets Loans on July 23, 2009. Both of the regulations apply to all banking institutions and will come into force three months after the date of its promulgation.
As a conclusion, the Provisional Measures and the Guidelines reflect the efforts by the regulator to enhance supervision of large amount loans. Banks thus need to make more detailed risk control internal policies in terms of loan documentation and disbursement procedures. At the same time, banks also need to consider how to implement some of the requirements in the Provisional Measures and the Guidelines, such as ensuring the truthfulness and completeness of due diligence reports and how to accommodate the “pay on trust of the borrower” rule with the various funding demands of borrowers.
Measures for the Administration of Pilot RMB Settlement in Cross-border Trade
1) Measures for the Administration of Pilot RMB Settlement in Cross-border Trade “Measures”
2) The Implementation of Measures for the Administration of Pilot RMB Settlement in Cross-border Trade “Implementation” (July 3rd , 2009)
The “Measures” and the “Implementation” stipulate for the first time that some designated and qualified enterprises are allowed to implement the RMB settlement in cross-border trade in the pilot areas. The authorities determine the list of enterprises according to their qualities and the recommendation from local government. The central bank of China will supervise the whole procedure and control the total amount of pilot RMB settlement.
The announcement of the “Measures” and the “Implementation” represents a substantial step for China’s RMB settlement in cross-border trade and RMB settlement will enter into a new starting point for cross-border trade. The specific arrangements in the “Measures” and the “Implementation” are effective in avoiding the risk of exchange rate fluctuations. They can help RMB to achieve regionalization and internationalization. Meanwhile, the “Measures” and the “Implementation” can also provide enterprises with various kinds of services such as RMB trade financing and export buyers' credit.
In addition, the “Measures” and the “Implementation” also stipulate that the qualified domestic commercial banks are allowed to provide RMB settlement services in cross-border trade in the pilot areas. The qualified commercial banks shall sign the RMB settlement agency agreement with the foreign banks which participate in the cross-border trade. Then the domestic banks need to open bank accounts of the foreign banks for RMB settlement and cooperate with them as their agency. The central bank of China will determine the service scope of RMB settlement and supervise the operation of RMB settlement in cross-border trade.
Chinese banks, which are participating in cross-border trade RMB settlement, will be able to introduce more settlement services such as documentary letter of credit, documentary collection, remittance, pre-receipt and pre-payment. Chinese banks have good opportunities to take advantage in expanding their business scope and improving their abilities to achieve internationalization from these new regulations.