Giddy up Partner: One More Way to Strike Gold in China

Soon, foreign investors would be able to invest in the form of partnership in China.

Currently, an investor can form a joint venture company (equity or cooperative), wholly foreign owned company, or representative office. With the impending promulgation of the 《外商投资合伙企业管理办法》(Foreign Investment Partnership Measures), a foreigner, either natural person or entity, can form a investment partnership with a local Chinese partner (Draft of the law in Chinese, here).

Chine Economic Review put out a nice article on some of the details of the law. It states:

The draft law reduces initial investment capital in comparison with forming a Joint venture or wholly foreign-owned Co.;

The draft law applies to “general partnerships and limited partnerships”;

Foreign-invested partnership has unlimited liability for partners;

Tax wise, foreign-invested partnership is a pass-through entity, where the partnership is not taxed, but the partners are taxed individually in accordance with individual tax law;

To invest in sectors inaccessible to a wholly-foreign owned Co., a foreign investor need to partner up with at least one Chinese party who has more than 50% in stake;

Foreign partners can contribute IP, cash, or reap property rights;

In terms of currency repatriation, no funds can leave China before the liquidation of the partnership (does this make sense?);

Distribution of profits and losses can be agreed upon in the partnership agreement as long as such distribution is reasonable.

In terms of the significance of this new law, the article wraps up by saying:

The creation of a new category of foreign investment in China is not an everyday occurrence. While certain restrictions that apply to foreign investors do not apply to domestic Chinese investors, draft rules such as the FIPL signal a significant change in China’s attitude towards business.

I agree that this law reflects a big step towards opening up more to foreign investors, but to those who want to partner up with a local entity or person (required), you probably want to stay clear of the sectors where foreign partners can only hold a minor stake. Without control, you are subject to the mercy of your Chinese partner(s), which can be a very bumpy ride to riches.

Full article here.