China Promulgated Rules of Registration of the Foreign-invested Partnership

China Promulgated Rules of Registration of the Foreign-invested Partnership
On 2 December 2009, China�s State Council issued the Administrative Measures for Foreign Enterprises and Individuals to Establish Partnership Enterprises in China (the �Measures�) (See Guolian PRC Law Client Alert No.11 December 2009 for details). The Measures officially opened the door for foreign investors to invest directly in a foreign-invested partnership (the �FIP�). As an unprecedented move, the Measures exclude the Ministry of Commerce (the �MOFCOM�) from the role of approving the establishment of the FIP, and authorize the State Administration of Industry and Commerce (the �SAIC�) to register the establishment of the FIP.
As supplementary rules to the Measures, the SAIC released on 29 January 2010 rules for registering the FIPs, known as the Administrative Provisions of Registration of Foreign-Invested Partnership Enterprises (the �Provisions�). The Provisions specify the details in relation to incorporation of the FIP, subsequent change and cancellation of the registrations, the relevant procedures, the annual inspection etc.. In addition, the Provisions also make some clarifications as to the control on investment in the restricted industrial areas and government approvals. The Provisions will take effect on 1 March 2010 along with the Measures.
Below are the key points in the Provisions.
Registration of the FIP
The Provisions provide that the SAIC together with its competent local counterparts is responsible for overall administration of the FIP registration in China. For the FIPs envisaging to engage primarily in the business of investment, the registration authorities are the SAIC�s counterparts at provincial or sub-provincial levels.
The Provisions confirm that the FIP can be organized in the form of either a limited partnership or a general partnership. It transpires that foreign investors will be able to directly invest in the FIP in China as a limited partner.
Unlike the foreign-invested company, the FIP investors are not required to pay the registered capital but the capital contribution in accordance with their partnership agreement. Moreover, the Provisions allow foreign investors to invest in the FIP with their legitimate Renminbi income derived from China subject to approvals from the State Administration of Foreign Exchange. The Provisions also allow foreign investors as the general partner in the proposed FIP to make capital contribution in the form of his/her labor services. However, the details for registering the contribution from the foreign investor remain to be released.
The SAIC is required to issue the business license within 30 days starting from the application date. It may take longer if the FIP�s business is related to a project in China subject to government approval.
Investing in the Prohibited or Restricted Industrial Areas
The Measures contain a general provision requiring foreign investment in the FIPs conform to relevant industrial policies guiding foreign investment and a joint statement to that effect be submitted to the SAIC.
China�s industrial policies guiding foreign investment are mainly embodied in its Catalogue of Industrial Guidance for Foreign Investment (the �Catalogue�). Meanwhile, there are other official sources that may adjust such policies from time to time. For applying different policies on foreign investment, the Catalogue categorises business areas into four groups, i.e. �encouraged� �permitted�, �restricted� and �prohibited�. The Provisions clarify that foreign investment in the FIP is prohibited from entering into all the �prohibited� industrial areas as defined in the Catalogue. In addition, foreign investment is also forbidden to flow into the industrial areas where any equity participation by a Chinese entity is required or a cap on the equity holding by a foreign investor is imposed. As for the scope of the requirement of conformity to industrial policies, the Provisions literally appear not only to refer to the context of the Catalogue, but to what extent the SAIC will interpret this requirement remains to be seen.
As regards the joint statement as above mentioned, the Provisions clarify that such statement shall be co-signed by all the investors explicating the business of the proposed FIP and its conformity to China�s foreign investment industrial policies. It must be submitted when filing for incorporation or for any subsequent changes.
Involvement of the Power of Government Approval
The Provisions reiterate that the investors shall obtain all the relevant approvals before applying for setting up the FIP, provided that the investment is subject to the government approval under a law, a regulation or a provision of the State Council. In addition, if the FIP is established to carry out an investment project in China that requires the government approval, the investors of the FIP shall obtain such an approval before setting up the FIP.
It is noteworthy that the Provisions establish a consultation mechanism, by which in two circumstances the SAIC will seek the opinions from other relevant authorities before making a decision on whether to register the FIP. The circumstances are: (i) the FIP is in the �restricted� industrial area as defined by the Catalogue but is subject to no government approval under a law or regulation; or (ii) the FIP is in such an area that is relevant to �certain functions of the relevant authorities�. The SAIC shall decide whether to register the FIP within 5 days after receiving the opinions from the relevant authorities. It indicates that the investment in the FIP in the �restricted� industrial areas may be subject to hidden scrutiny from the relevant authorities, albeit no approving power is conferred on the authority by a law or a regulation. It is to be seen how the SAIC will coordinate with other authorities to balance its powers and liabilities and those of others.
Observations
The Provisions are yet to be tested in practice. From procedural perspective, the FIP appears to be a convenient option for many foreign investors to set up a business establishment in China. For a significant number of businesses, the streamlined procedure for incorporating the FIP will be less onerous and time-consuming than those of traditional foreign business vehicles such as wholly foreign-owned enterprises or joint ventures.
Nevertheless, foreign investors shall bear in mind that the tightened restrictions on the industries and sectors in which the FIP is permitted to operate, as well as various visible or invisible government scrutiny, can still impose significant uncertainty on the investment. Moreover, the SAIC, especially its local counterparts, may not be as experienced as the MOFCOM in implementing China�s foreign investment industrial policies. Investment in the FIP may be complex at the early stage. It would be advisable to keep close watch on the relevant regulatory development and consult your attorney to make sure the FIP is the optimal form for the business you envisage to carry out in China.
ABOUT THE AUTHOR: Steven Wei Su
Steven Wei SU is a partner at Guolian PRC Lawyers. His practice focuses on general corporate, M&A, finance and dispute settlement.