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Establishment of Partnership Enterprise by Foreign Enterprises or Individuals in China

[ NEWS! ] Since March 1, 2010: Measures of Establishment of Foreign Enterprises or Individuals Partnership Enterprises (PEs) in China is taking effect. The regulation, which take effect since March 1, 2010, are known as the Administrative Measures for the Establishment of Partnership Enterprise in China by Foreign Enterprises or Individuals. Ther's no required minimum registered capital for a Partnership Enterprise (PE) in Shanghai, Beijing, Hangzhou, Shenzhen and rest cities of China. Information provided below will guide you to:

Foreign Invested Partnership Enterprise (FIPE)

Introduction to PE

The Foreign Invested Partnership Enterprise (PE) is a unlimited liability business entity without minium requirements on registered capital.

A partnership in the People's Republic of China is a business entity governed by the Partnership Enterprise Law passed by order of the President of the People's Republic of China to authorize and govern partnership enterprises. A partnership is a type of business entity in which partners share with each other the profits or losses of the business undertaking in which all have invested.

Since June 1, 2007, Partnership Enterprise Law came into force and established partnerships as a legal business entity, Foreign Enterprises or Individuals establish Partnership Enterprise is not allowed only until March 1, 2010.

The term partnership enterprise refers to general partnerships and limited partnerships which may be established within China by individuals, legal persons and other organizations. A state-funded company, state-owned company, listed company, public welfare-oriented public institution or social organization may not become a general partner of a limited partnership

Different types of Partnership Enterprise

Following are different types of FIPE. Commonly,

1. General partnership Enterprise (GPE): A general partnership enterprise may be formed by general partners who bear unlimited joint and several liability for the debts of the partnership. The general partners share unlimited liabilities for the debt of the partnership.
2. Limited partnership enterprise (LPE): A limited partnership enterprise is formed by a combination of general partners and limited partners where the limited partners bear the liabilities for the partnership's debts to the extent of their capital contributions.
3. Special General Partnership enterprise (SGP): A special general partnership enterprise resembles a general partnership except that it must be a professional service institution offering services requiring professional knowledge and special skills. The structure shields co-partners from liabilities due to the willful misconduct or gross negligence of one partner or a group of partners. It is very similar to limited liability partnership in Europe and America.

Advantages of partnership enterprise

The advantages of establishing a PE , compared with other types of enterprises, include, but not limited to:

1. No corporate income tax for partnership enterprise;
2. No requirements on minium registered capital;
3. Less procedures comparing with Wholly Foreign Owned Enterprise or Joint Venture
4. Capability of converting RMB profits to US dollars for remittance to its parent company outside of China;
5. Foreign Enterprise or Individual is allowed to establish a Partnership Enterprise with Chinese individual (While Chinese individual is not allowed to have Joint Venture with foreign investor)
6. The profit distribution of a PE could follow an informal negotiated agreement or abide by scheme adopted in the partnership agreement (While for LLC, profit distributions is according the the pertage of invetment of shareholders)

Disadvantages of partnership enterprise

1. Unlimited liability; A partnership must pay all its debts with property contributed to the partnership by the partners. If the partnership is a general partnership then the partners bear joint and several liability;
2. Limited business names options: Can't have business name with "Company" in it, eg, can't have name lie XYZ Co., or XYZ Co., Ltd. and could only choose names like: XYZ Firm(PE), XYZ center (PE)
3. Property rights of partnership enterprise is difficut to be transfering to a third party as according to the Partnership Enterprise Law: the property rights of partnership transfer MUST be agreed by all partners in a PE;
4. China has not adopted Natural Person's Bankruptcy system, credibility of the partners would be hard to maintain if PE involves into a hard situation
5. As for trading business of a PE, since PE is not a general tax payer, PE can't get VAT status, and can't apply for VAT rebate accordingly.

Capital contribution

A partner may contribute capital to the partnership to garner a share of the partnership's profits or losses. A capital contribution may include money, intellectual property right, land use right or other properties, or labor services at a valuation determined by agreement among the partners. If the partnership is a limited partnership, then the limited partners may not make capital contributions with labor services.

Distribution

The default distribution scheme of profits or losses follows the proportion to capital contributions made by the partners. However, the distribution scheme may follow an informal negotiated agreement or abide by scheme adopted in the partnership agreement. If the proportions of capital contributions cannot be discerned, then the profits or losses will be distributed equally by the partners. The partnership agreement may not distribute all losses or all profits to just one or a group of partners within the partnership.

 

GENERAL TAX INFORMATION

No corporate income tax required. The partners shall pay their respective share of the partnership income.

 

PROFIT REPATRIATION

China Government allows Foreign Invested Parnter Enterprises remit their profits out of the country and such remittances do not require the prior approval of the State Administration of Foreign Exchange (SAFE). Dividends cannot be distributed and repatriated to oversea if the losses of previous years have not been covered while dividends not distributed in previous years may be distributed together with those of the current year. Repatriating the Registered Capital to home countries is forbidden during the term of business operation.

TERMS AND TERMINATION

In China, terms of 15 to 30 years are typical for a PE. It is also possible to obtain extensions of thePE's duration.

 

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