Other Authors

Issuing Body: State Administration of Industry and Commerce
Issuing Date: January 29, 2010
Effective Date: March 1, 2010

Two months after China's State Council released the Administrative Measures for the Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals, which for the first time provided a legal framework for foreign-invested partnerships to operate in China, the State Administration of Industry and Commerce (SAIC) has issued detailed rules to guide the registration of such foreign-invested partnerships (FIPs). The Administrative Regulations on Registration of Foreign-Invested Partnership Enterprises (FIP Registration Regulations), which took effect on the same day as the State Council's rules, provide detailed guidelines on how FIPs are to be structured and registered with the government.

The Administrative Measures for the Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals (FIP Measures) expressed clearly the Chinese government's desire to "boost the development of the modern service industry" (accounting, consulting, etc.) by encouraging foreign enterprises and individuals with advanced technology and management experience to establish partnerships in China. By enabling foreign enterprises and individuals to establish and invest in partnerships, the FIP Measures provided an important and relatively flexible new vehicle for foreign investment in China. The FIP Registration Regulations move that process further along.

Both the FIP Measures and the FIP Registration Regulations are more broadly governed by China's Partnership Enterprise Law and the Administrative Measures on Registration of Partnership Enterprises, which were issued in 1997 and revised in 2006 and 2007, respectively. The Administrative Measures on Registration of Partnership Enterprises apply to both domestic and foreign-invested partnership enterprises, while the FIP Registration Regulations govern only foreign-invested partnerships.

Types of Foreign-Invested Partnerships

Foreign investors are allowed to establish a FIP as either a general foreign-invested partnership (General FIP) or a limited foreign-invested partnership enterprise (Limited FIP).

A General FIP must have at least two partners, with no upper limit on the number of partners. With a General FIP, every partner bears joint and several liability for the partnership's debts. Each partner may sign contracts and conduct business on behalf of such a General FIP. All partners may also jointly appoint one or more individual partners to sign contracts and conduct business on behalf of the General FIP, with the partners' unanimous agreement.

A Limited FIP may have between two and 50 partners. A Limited FIP is composed of both general and limited partners, with at least one general partner. General partners bear joint and several liability for the Limited FIP's debts, while limited partners bear limited liability for debts, to the extent of their capital contribution. Limited partners cannot execute contracts or incur obligations on behalf of a Limited FIP.

Prior Approval Before Registration of a FIP

In an attempt to simplify the regulatory scheme governing FIPs, the State Council's FIP Measures do not expressly require approval from the Ministry of Commerce (MOFCOM) or its local counterparts before a FIP can register with the Administration of Industry and Commerce. But some FIPs may eventually be subject to prior MOFCOM approval. According to the FIP Registration Regulations, laws, rules or ordinances of the State Council may make the establishment of some or all FIPs subject to MOFCOM approval before registration. Currently, however, there are no rules requiring such prior approval.

It should also be noted that, under China's broader legal regime for foreign investment, foreign investors who propose to invest in such industries as transportation, finance, telecommunications, publishing and advertising (as well as others) must obtain prior approval from the relevant agency before registration of the establishment of any type of foreign-invested enterprise that involves such industries. FIPs are likewise subject to those prior approval requirements. The FIP Registration Regulations state explicitly that if a foreign-invested partnership's business scope involves certain industries (such as those mentioned above) for which prior approval is required before registration, a request for prior approval must be submitted to the appropriate agency.

Industry-Specific Restrictions; Beyond Prior Approval

In addition to being subject to industry-specific requirements for prior approval, FIPs are also subject to other industry-specific restrictions. FIPs may not invest in projects that: (a) fall within the "forbidden" category of the Foreign Investment Industrial Guidance Catalogue (see China Law Update, January 2008); (b) are listed in the catalogue as "limited to equity joint venture," "limited to cooperative joint venture," "limited to equity joint venture or cooperative joint venture," "Chinese party to have shareholding" or "Chinese party to have relative shareholdings"; or (c) are subject to limits on the proportion of foreign shareholding. (In automotive manufacturing, for example, foreign shareholders may not exceed 50 percent ownership.)

Types of Capital Contribution to a Foreign-Invested Partnership

According to the FIP Registration Regulations, a foreign partner may make a capital contribution to the partnership in the form of cash, in-kind contribution, intellectual property, land use rights or other property rights. If a foreign investor makes an in-kind contribution or contributes intellectual property or a land use right, a statement regarding the negotiated valuation of the contribution that has been signed by all partners must be submitted to the registration agency. Alternatively, all partners would have to engage a qualified valuation firm to assess the value of the contribution and submit a valuation certificate issued by the firm to the registration agency.

In addition to the above contribution methods, a foreign general partner may make a contribution in the form of individual labor, but a limited foreign partner may not do so. If a foreign general partner makes a contribution in the form of individual labor, he or she must adhere to legal requirements and procedures regarding the employment of foreigners, such as obtaining a work visa, work permit and so forth.

Registration of a Branch of a FIP

An existing FIP may establish branch offices. A branch office can only engage in activities that are within the business scope of the parent FIP. The establishment of a branch office must be registered with the agency that has jurisdiction over the location of the branch office.

Annual Inspection of a FIP

Between March 1 and June 30 of each year, every FIP must complete and submit to the agency with which it registered a set of standard forms titled "Report of Annual Inspection" that provide certain information, including basic information about the enterprise and financial data. The registration agency has the authority to determine whether the enterprise passes annual inspection (adheres to laws and rules).

Information Sharing

The FIP Registration Regulations incorporate an information-sharing system between various levels of SAIC and MOCFOM, both national and local. The regulations also require the SAIC and its local counterparts to notify MOFCOM with relevant FIP information, including the registration of establishment, changes to the registration, cancellation of a registration and annual inspection information.

Conclusion

By providing detailed rules for the registration of foreign-invested partnership enterprises in China, the FIP Registration Regulations advance the State Council's avowed goal of promoting this new form of foreign investment and advancing the modern service industry in China. However, in order to make this new business vehicle more viable in the marketplace and more attractive to foreign investors, the government is expected to issue more follow-up rules governing other important aspects of foreign-invested partnerships, including tax, foreign exchange and customs.