Time for a change?
As of 18 days ago, foreign invested partnerships or FIPs (all investment vehicles in China must have an acronym) are now a permitted investment vehicle in China. I wrote about the introduction of FIPs last year and the possible tax advantages in a post entitled “Too much choice is never enough”.
Geraldine Putra-Johns on her blog View to China recently discussed, in a post entitled “Brand new possibilities for partnering in China” the possibilities provided by FIPs, particularly in the PE industry. Geraldine notes the following:
In any case, the landscape for foreign investment in China has shifted a little with this change and I think as a result that we are on the cusp of a mini-boom for P-E in China. As is often the case, this might not be recognised until we are well into it.
All said, it’s an interesting move by the Chinese authorities.
Personally, I am committed to closely focussing on and understanding the FIP model and related developments, because I see this as heralding a potentially new and more flexible regime for China all around.
I will not offer any comments on whether China is on the cusp of a PE boom as, frankly, there are many people better placed, including Geraldine, to predict general business trends in China. However, I do agree that the FIP model offers considerable new possibilities for investing into China. I, like Geraldine, am veyr committed to exploring the opportunities provided by FIPs. I think it will take some time before FIPs become a popular model (it shouldnt) but the benefits are too strong for it not be picked up.
As I said in my original post, partnerships generally provided tax advantages on two levels. Firstly, tax is only applied at one level (the partners) in contract to companies (such as WFOEs and JVs) where tax is applied at the company and shareholder level. Accordingly, FIPs should automatically provide a 10% China tax saving without any creative tax planning. Secondly, for as business with high start up costs, the ability for the partners to immediately utilise the losses to deduct from other income is a strong benefit. In contrast, the losses of a company will only be able to be deducted once the business starts making a profit. In the venture capital industry, that could be a number of years away.
The only true disadvantage of partnerships is in respect of liability. There are two solutions to this. Firstly, the partnership law permits limited partnerships, albeit place restrictions on their role in management. Secondly, as I noted in my original post, where the investment in the partnership is done through a SPV, liability will generally be quarantined at the SPV.
The State Administration for Industry and Commerce (SAIC) recently issued Order No. 47 which outlines the procedural requirements for establishing partnerships. I will be revisiting this issue in the next few weeks. The critical point is that al foreign investors should explore whether the partnership model provides them is an appropriate choice for them and not simply adopt the old WFOE and JV structures.
