Upcoming Mallesons seminarsForeign investors in Renminbi funds.
What do you need to do?Be familiar with the new rules on foreign invesments in Renminbi funds.
Erik Leyssens (雷耀明)
Registered Foreign Lawyer
Yun Hu (胡云霄)
Solicitor
Hayden Flinn (范凱敦)
Partner
T +852 3443 1113
Hong Kong
Hayden Flinn
(范凱敦)
Beijing
John Shi
(史衛)
Shanghai
Martyn Huckerby
(贺墨亭)
Offshore private equity funds are confronted with significant hurdles if they want to make acquisitions in China, as they need to attend to the often long and arduous approval process applicable to all foreign acquisition and direct investment projects. One way to overcome this would be to bring investment funds onshore so that they are treated as local investors in China.
Such onshore funds are referred to as “Renminbi funds” because, once established, they can invest in China using the local currency, the Renminbi. As Renminbi funds are treated as local investment funds, they should in theory need fewer government approvals when they acquire businesses and make onshore investments. However, practice does not always match theory, and certainly not in China. The ability to establish Renminbi funds has been hampered by too much regulation on the one hand and too little regulation on the other.
Too much regulation
Since 2003, foreign funds have been able to gain an onshore foothold by setting up a venture capital company inside China. However, the structure is strictly regulated and therefore lacks the flexibility that private equity funds generally enjoy abroad. Foreign-invested venture capital companies must mainly invest in companies in either the high- or new-technology sector and do not have a general investment mandate in other sectors. Further, each local acquisition or investment by the fund still requires government approval.
Too little regulation
Private equity funds outside China are often organised in the form of limited partnerships. The much anticipated PRC Partnership Enterprise Law was a disappointment to many funds investors when it came out in 2007. For the time being, only domestic partnerships can be established and this will not change as long as the PRC does not finalise the draft regulations that would allow partnership enterprises to be established with foreign investment. The draft has been circulating for more than a year now, but it is unknown when it may be enacted.
Recent openings
Amidst renewed efforts to promote the private equity industry in China, Beijing, Shanghai and Tianjin have issued rules on foreign-invested Renminbi funds. These new rules appear to offer the flexibility required by investment funds and are more in line with international practice. Under these local rules, a Renminbi fund can be established in the form of a company, ie a limited liability company or a company limited by shares, or a partnership. Foreign companies, enterprises, other economic entities and individuals may become investors in the funds or fund management companies.
The establishment procedures have been greatly simplified. Unlike for foreign invested venture capital companies, no government approval is required other than approvals from local authorities.
Investors in Renminbi funds are also eligible for favourable tax treatment including preferential tariffs for partners (investors) and special income tax treatment for senior and mid-level management of a fund or a fund management company established in Pudong, Shanghai. Similar treatments have been granted in Tianjin and Beijing.
As Shanghai is being primed to become a global financial centre, the government of Pudong New Area in Shanghai issued on 2 June 2009 further rules on the establishment of foreign invested fund management companies in Pudong. Foreign invested fund management companies must take the form of a limited liability company and have a minimum capital injection of USD 2 million. At least one of its investors must be specialised in fund management business.
Practice and future
As the local rules are quite recent, there is a great degree of uncertainty as to how they will be implemented in practice. For instance, the legal basis for the favourable tax treatment is unclear and it remains to be seen whether this will be challenged by the central tax authorities. The new rules are certainly a great step forward on the private equity investment path in China. In the meantime, the Chinese government is reportedly active in formulating more rules on fund and fund management companies at national and local government level.