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By Matthew, March 18, 2010 9:43 am

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.

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By Matthew, February 8, 2010 1:42 pm

In a clear sign that China is getting increasingly bold in its response to an ongoing trade dispute with the U.S., Chinese authorities Friday slapped preliminary import duties of as much as 105.4% on U.S. chicken products.

The Ministry of Commerce which announced the decision said U.S dumping is hurting China’s domestic poultry industry. Once the new directive takes effect Feb. 13, U.S. exporters, including Pilgrim’s Pride Corp. and Tyson Foods Inc., will be required to deposit the duty with Chinese customs, pending a final decision on the matter.

These comments come from a Wall Street Journal article. This is more a trade issue rather than a tax issue, but in the week before Chinese new year I thought it was some welcome light relief. This is apparently part of the ongoing broader trade dispute between China and the US with the primary issue being the current valuation of the Chinese Yuan. I wont go into that issue has it has been discussed to death by people that have a stronger understanding of monetary policy than I do.

However, a question that must be asked is how this relates to the recent “strong stance” taken by the US against China on a number of issues – sale of weapons to Taiwan etc. View to China covers these issues well in a recent blog entry. This seems to be further vindication of the view that much of the recent argy bargy between China and the US is purely domestic political point scoring rather than legitimate policy making.

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By Matthew, January 28, 2010 9:36 am

On January 4, 2010, China’s State Administration for Industry and Commerce (“SAIC”) and the Ministry of Public Security jointly issued the Notice on Further Administration of Registration of Foreign Companies’ Resident Representative Offices (the “Notice”). The Notice provides that business operations of representative offices will face higher scrutiny, companies must comply with additional requirements to establish their representative offices or renew their registration certificates, and companies will be limited in the number of representatives that they can appoint – for more go http://www.omm.com/china-tightens-restrictions-on-foreign-representative-offices/

The lawyers over at O’Melveny & Myers have written about a new Notice indicating that the authorities intend to target representative offices (ROs). The reduction of the renewal period to 1 year is of particular interest.

A little over a week ago I started a series on my predictions on the major China tax developments in 2010. At the time of writing my initial, and at this stage only, post in that series I was not aware of the Notice referred to above (I have enough trouble keeping track of the notices issued by the SAT). However, in my post I commented ‘[o]ur indications are also that less and less ROs will be approved’. This comment was based on observations of the officials approach, and our discussions with them, to ROs over the past 12 months. We have been hearing concerns about the tax and general compliance of all ROs in China for a lengthy period of time. It is interesting to see the timing of this Notice and the fact it confirms what we have been hearing.