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Forming A Chinese Entity. What About The Fourth Way?

By Dan Harris on Posted in China Business, Legal News

I received the following email today (modified slightly to take out any possible identifiers):

My name’s William and I am a Chinese. I am also an avid reader of China Law Blog. So when Frank, my American friend who owns a translation services company in America, asked me about how to set up a limited partnership in China, I turned to your blog for info. I made a search using the keyword “partnership” and found a number of great articles on how to establish a business in China. And it appears that three ways repeat constantly: a WFOE, a JV and a representative office, with the WFOE seemingly highly recommended. I also noted that as early as back 2009, a new partnership law had begun to be talked about. I did a little homework and found that partnership law had been passed and come into force since Dec 2009 and Mar 2010 respectively. However, I didn’t find any articles talking about it (good chances are that I missed them). So I was wondering if you could kindly recommend articles comparing pros and cons of a WFOE and a partnership. I’d really appreciate it.

I responded as follows:

I am not aware of any such articles nor am I aware of anyone who has set up such a partnership or been in one. The problem is that these partnerships seem only to exist in theory. There are not nearly enough laws/regulations/statutes on the books to tell us how they should work or how the governement will treat them.  Because of this, they probably don’t make sense for anyone. And if they do, I do not know anyone with any experience with them. That is why you will see so much on WFOEs, Joint Ventures and even Representative Offices, yet virtually nothing on Partnerships.

Hope this helps.

What do you know?

  • Max Peiro

    I also heard about this partnership, being Foreign Investment Partnership (FIP) the official name. My understanding is that there are no capital requirements, but the partners need to respond to any liability with their personal assets. On top of this, the profit of the partnership is considered personal income and therefore taxed through IIT instead of EIT. Based on these, and the difficult of establishing it in practice (as you mentioned, it is more of a theory concept), I do not think that many foreigners will use this investment vehicle.

  • Twofish

    Unlimited joint and several liability for general partners -> Usually a bad idea.

  • China Lawyer

    Good analysis. They exist in theory, but I too have never heard of anyone actually doing one.

  • William

    Hi, I am “William”. Thanks for your insights!
    I found an article titled “China’s Latest Partnership Investment Vehicle for Foreign Investors“ by the Salons law firm here: http://goo.gl/Ib65Q
    It addresses some merits of FIP enterprises, eg easier to set up, less tax.
    I consulted with the Bureau of Industry and Commerce and was told FIP was indeed new and few people had used it. And they gave me a list of documents (up to 14 of them) to prepare in order to set up an FIPE. So, to this point, I agree they exist in theory, at least.

  • http://en.doroto.com Jason Tian

    well, the very first foreign invested partnership enterprise in Shanghai had attracted quite a lot of media attention. This partnership is one formed for purpose of equity investment purpose. such partnership is believed to a good vehicle to set up RMB fund in China.
    For partnerships in other industries, I myself is not aware of any one. I once went to Pudong governent for information on the question how to convert and use foreign capital to be injected into such partnerships. I was told that there have been such partnerships set up. They did not know much about forex issue. Then I called the SAFE shanghai office on the question, and i was told that there was no rules in regard so foreign exchange cannot be converted and used at the moment.
    So, i guess it is possible to set it up but the partnership cannot use the capital denominated in foreign currency that is contributed by foreign party.

  • Fredrik Groenkvist

    Im in the process of setting up a FIPE in Pudong right now. Seems to be a pretty straight forwards process so far and the routine is in place but when it comes to no requirement for registered capital its not entierly true – you are still looking at minimum 100 k RMB investment if you want to get your application granted – thats what my lawyer told me at least.
    The FIPE entity has been avalible since early 2010 and theres been a few houndred partnerships set up between foreign and chinese citizens – but due to the unlimited liablity it may not be a very attractive business entity for other than very small companies

  • Twofish

    I’ve also heard of partnerships being used. The typical situation is when you have passive investors that are willing to just hand over their money to the general partner and get a periodic check. This is the situation in hedge funds/private equity/real estate trusts, but it’s not your typical JV situation.
    There are also legal reasons why you rarely hear about partnerships. Limited partnerships are typically exempt for securities registration both in China and the US because they are “private placements.” Any public statements (even press releases) that could be construed as a “public offering” would cause the partnership a lot of legal difficulty for no benefit as they would then have to register the securities. The consequence of this is that partnerships are extremely low key.

  • William

    @Fredrik I consulted with local Bureau of Industry And Commerce and was told there was no threshold for registered capital. the 100k RMB threshold your layer told you about could be due to the nature of your business, I guess?

  • Wagas

    I think these partnerships were intended mostly for Private Equity type deals. I am not aware of them having been used even for that however and the lack of regulations is certainly one of the reasons for that.

  • Fredrik Groenkvist

    @Willian: That is correct, but they may or may not approve your application for the business license if they find your intended investment capital too low. It also may or may not affect your visa application. Maybe registered capital is the wrong term since there is not actuall check up on the amount you invest… all I can say is that I will know a lot more about this subject 1-2 months from now.

  • William

    @Fredrik I am the Chinese partner in the partnership. I appreciate your insight. Thank you! and I wish everything will go well for your application. Let’s wait for your good news :)