Q&A on New China Partnership Rule

China is planning new rules that will allow foreign companies to set up locally registered partnerships, a copy of a draft regulation showed, a landmark move aimed at attracting foreign investments.

Foreign firms and nationals who want to start local partnerships must seek approval from China’s Ministry of Commerce, according to document obtained by Reuters from industry sources.

WHO CAN SET UP A LOCAL PARTNERSHIP?

Two or more foreign nationals can apply to the commerce ministry, or local government agencies authorised by the commerce ministry, for approval to set up locally registered partnerships.

Foreign companies with good track records in business and have been in operation for at least three straight years can apply.

Foreign firms and nationals can also choose to cooperate with Chinese companies and citizens to apply to set up a jointly invested partnership company in China.

WHAT ARE THE BENEFITS/LIMITS OF THESE PARTNERSHIPS?

You can do business in China within the scope of business approved by the government. The government will approve specific business scopes on a case-by-case basis upon your request when you apply for the locally registered partnership company in China.

The government will punish any breach or change of business scope made without government approval.

Even though you can be locally registered as a partnership company in China, you will be still regarded as a foreign-invested entity and have to obey other foreign investment rules issued by the commerce ministry.

The commerce ministry has a list of domestic sectors where the government encourages, discourages or even restricts and forbids foreign firms’ investment. Strategically or politically sensitive deals will still be subject to government approval.

WHO GAINS FROM THE PROPOSED REGULATIONS?

Lawyers say the new rules are expected to mainly affect foreign accounting, law and investment firms. Investment firms include global buyout, private equity, venture capital or real estate funds, which want to expand thier business in China.

Currently, these professional and investment firms can only register in China as representative offices of their parent companies or as advisory service providers.

The new rules will give long-awaited “legal status” to many global investment funds, which have already been investing in China through their offshore offices or other foreign investment channels.

For a foreign private equity company, the new rules will make it easier to raise local currency yuan-denominated funds with support of the local government where the local China partnership company is registered, some lawyers say.

China partnerships will also be allowed to transfer foreign currency capital, for example, U.S. dollars, to the local unit’s onshore account, though the amount will be subject to China’s foreign exchange regulator.

Lawyers say local governments are also expected to offer tax discounts to foreign-invested partnerships as they want to boost local economies but details remain unclear and will vary with different local governments.