| A new door to partnership is opened by the Chinese | | | | regulations, such approval shall be sought in advance |
| government to the foreign investors under this | | | | and submitted at the time of registration with SAIC |
| post-financial turmoil era in order to attract more | | | | local branch. These pre-approvals involve, but not |
| foreign investment and provide more employment. | | | | limited to, the Ministry of Land, the Ministry of |
| On November 25, 2009, the State Council of the | | | | Transport, the China Securities Regulatory |
| PRC promulgated the Measures for the | | | | Commission, the China Banking Regulatory |
| Administration on the Establishment of Partnership | | | | Commission and the China Insurance Regulatory |
| Business by Foreign Enterprises or Individuals in China | | | | Commission, etc., which depends on the business of |
| adopted at the 77th executive meeting of the State | | | | the foreign partnership. |
| Council on August 19, 2009, which shall come into | | | | Second, the Provisions on Guiding the Orientation of |
| effect as of March 1, 2010 ("the Foreign Partnership | | | | Foreign Investment (2002) and the Catalogue for the |
| Measures"). The Foreign Partnership Measures is | | | | Guidance of Foreign Investment Industries (revised in |
| regarded as supplementary to the Partnership | | | | 2007) (collectively "foreign investment industrial |
| Business Law of the People's Republic of China ("the | | | | policies") set up the industrial threshold for the foreign |
| Partnership Law"), article 108 of which provides that | | | | partnerships, which are the industrial policy basis for |
| the measures for the administration on the | | | | the SAIC local branch to review registration |
| establishment of partnership business by foreign | | | | application to establish foreign partnership in China. |
| enterprises or individuals shall be formulated by the | | | | This will obviously increase the working load of the |
| State Council. Therefore the Partnership Law is the | | | | SAIC local branches since they are lack of the |
| basic law for foreign enterprises or individuals | | | | experience in this kind of foreign investment industrial |
| (collectively "foreign partners") to establish the | | | | policies review. We may also anticipate that there |
| partnership business in China ("foreign partnership"). | | | | might be different explanation and implementations |
| The initial effort to formulate this kind of measures | | | | on the above two documents, which will be the |
| with the authorization of the Partnership Law can be | | | | problem faced by those foreign partners who submit |
| tracked to January 2007 when the Ministry of | | | | the application in the first half year after the Foreign |
| Commerce of the People's Republic of China (MOC), | | | | Partnership Measures comes into force on March 1, |
| as requested by the Legislative Affair Office of the | | | | 2010. |
| State Council, promulgated a draft of the Measures | | | | The third threshold is that the verification is required |
| for the Administration on the Foreign Funded | | | | if the project invested by the foreign partners falls |
| Partnership Business ("the Draft") for public | | | | into the scope described in the Provisional Measures |
| consultation. The Draft mostly reflect the intention of | | | | Governing Verification of Foreign Invested Projects. |
| the MOC to remain the approval authority for the | | | | The charging authority is the National Development |
| foreign partnerships as it does in the setup of the | | | | and Reform Commission and its local branches, which |
| other three types of FIEs, such as equity joint | | | | depending on the amount of the total investment |
| venture, contractual joint venture and wholly foreign | | | | and the nature of the project. |
| owned enterprise (i.e., EJV, CJV and WFOE, | | | | It is necessary to note the forth threshold hidden in |
| collectively FIEs). But the final Foreign Partnership | | | | the important expression in article 3 of the Foreign |
| Measures kick the MOC and its local branches ("the | | | | Partnership Measures, which put the "rules" as the |
| MOC local branches") out from the charging authority | | | | legal basis for the establishment of foreign |
| with the replacement by the local authorized branch | | | | partnerships. In the legal system of China, it indicates |
| of the State Administration of Industry and | | | | that the State Council authorizes the ministries or |
| Commerce (SAIC local branch), which is unexpected | | | | departments under the State Council ("the Ministries") |
| to but welcome by the professionals and | | | | to issue necessary "rules" applicable to foreign |
| entrepreneurs. This article will do analysis on the | | | | partnerships. It also reflects that the existing valid |
| Foreign Partnership Measures from four perspectives: | | | | "rules" issued by the Ministries, including those |
| foreign partnership models, foreign partners' | | | | applicable to the representative offices opened by |
| qualification, thresholds and registration of the foreign | | | | foreign law firms in China, are still the barrier for the |
| partnership, in aiming to describe a clear foreign | | | | foreign partners to access the local market in China. |
| partnership roadmap for foreign partners. | | | | The final threshold comes from the commitment of |
| Foreign Partnership Models | | | | China in its WTO accession. Although the State |
| Foreign partners can set up the foreign partnership in | | | | Council encourages those foreign partners who have |
| China in three models: a. with the other foreign | | | | advanced technology and management experience to |
| partners; b. with the Chinese individuals, legal persons | | | | establish foreign partnership in China with the purpose |
| and the other organizations registered and located in | | | | to facilitate the development of the modern service |
| Mainland China; c. through participating the existing | | | | industry, at this stage, the services industries may |
| domestic partnership. | | | | only limited to those listed in the Schedule of Specific |
| In the models above, the foreign partners have the | | | | Commitments on Services (Annex 9 of the Protocol |
| option to take the form of general partnership, | | | | on the Accession of the People's Republic of China) |
| limited liability partnership or limited partnership | | | | and the openness will not be wider than the |
| stipulated by the Partnership Law, among which the | | | | commitments therein. |
| limited liability partnership is only for the professional | | | | Registration of the Foreign Partnership |
| institutions such as law firms and accounting firms. | | | | In the FIEs regime, all investments by foreign |
| Comparing with model a and b, model c seems more | | | | investors need the pre-approvals of the MOC or |
| feasible and time-and-cost saving for the foreign | | | | MOC local branches. In the approval process, the |
| partners. A complete due diligence will be conducted | | | | MOC or MOC local branches will review, but not |
| in order to minimize the risk from the operation of | | | | limited to, the content of the application, the article |
| the domestic partnership before the participation | | | | of associations of FIEs and contracts signed by the |
| date of the foreign partners. In consideration of the | | | | parties if any. Generally, this approval procedure will |
| current administration and nature of the partnerships, | | | | take 5 working days to 90 working days depending |
| lack of credibility and the other elements in China, it | | | | on the nature and total investment of the project. In |
| will be difficult to get a complete due diligence report | | | | this regard, the cancel of this approval for the foreign |
| satisfied with the foreign partners. Therefore, models | | | | partnership will significantly escalate the speed of the |
| a and b are highly recommended. Which model of a | | | | establishment in the procedural stage and to a great |
| or b take needs the consideration and balance of the | | | | extent reduce the uncertainty from the MOC or |
| foreign partners based on their business plan, legal | | | | MOC local branches. |
| structuring, such as whether foreign partners | | | | The Foreign Partnership Measures stipulates that the |
| themselves intend to do the business competing with | | | | representative or agent of all the partners shall |
| the foreign partnership and how to exit by | | | | submit the establishment application only to the SAIC |
| transferring the contribution in the partnership, ect., | | | | local branch and not the SAIC. The submission shall |
| and the thresholds discussed below. | | | | include, besides the documents required by the |
| Foreign Partners' Qualification | | | | Regulations on the Administration of Registration of |
| The difference in the expression on the partners | | | | Partnership Business (revised in 2007, "Partnership |
| from overseas and China should be noted. Foreign | | | | Registration Regulation"), the explanation on |
| partners only include foreign enterprises and | | | | compliance of the foreign partnership with the foreign |
| individuals. The Chinese partners include Chinese | | | | investment industrial policies, which will ease the |
| individuals, legal persons and the other organizations. | | | | review by the SAIC local branch. In this regard, the |
| There is no unified legal interpretation on the | | | | review may not be limited to the formality as |
| "enterprise", though mostly it refers to the profitable | | | | provided in article 16 of Partnership Registration |
| organizations. This uncertainty may come from the | | | | Regulation. It seems impossible for the SAIC local |
| prudency of the legislator of China on the | | | | branch to issue the license to the foreign partnership |
| qualifications of foreign partners. Under article 184 of | | | | on the spot. In this scenario, the SAIC local branch |
| the Opinions of the Supreme People's Court on | | | | shall make a decision on whether to issue the license |
| Several Issues concerning the Implementation of the | | | | to the foreign partnership within 20 working days |
| General Principles of the Civil Law of the People's | | | | after the date it accepts the complete application. |
| Republic of China for Trial ("the Opinions"), this | | | | The Foreign Partnership Measures is the second case |
| expression of "enterprise" on the foreign partners | | | | for MOC and MOC local branches to lose approval |
| allow the SAIC local branch more discretion to judge | | | | authority in the recent years. The first case is for the |
| whether the foreign partner is a qualified "enterprise" | | | | representative office opened by most of foreign |
| or not in accordance with the relevant Chinese laws. | | | | enterprises in China since 2004. Although the loss of |
| In this scenario, the foreign partners need to note | | | | approval authority, the MOC local branches at the |
| that they should not fall into the types of entities | | | | same level with the SAIC local branches accepting |
| prescribed in article 3 of the Partnership Law if they | | | | the application for establishment of foreign |
| aim to be a general partner, which says that wholly | | | | partnership shall be advised the registration |
| state-funded company, state-owned company, listed | | | | information (including the establishment, alteration and |
| company, public-welfare-oriented institution or social | | | | cancel) of the foreign partnerships by the latter. |
| organization may not become a general partner. | | | | Conclusion |
| Regarding the foreign individuals, they must have full | | | | For those foreign partners not interested in |
| capacity for civil conduct in accordance with article 14 | | | | establishing professional foreign partnerships such as |
| of the Partnership Law. The international private law | | | | law firms in China, they are now can access the |
| problem will also be involved here. Pursuant to article | | | | Chinese market with a presence in the option of |
| 180 of the Opinions, the foreign individuals who | | | | partnership. The approval procedures involved with |
| conduct civil activities in the territory of China, shall | | | | the MOC or its local branches as set up for FIEs has |
| be regarded as having full capacity for civil conduct if | | | | been removed. The minimum investment (registered |
| they have that in accordance with China laws, no | | | | capital) requirement for FIEs has been reduced to |
| matter what their national laws requires for their | | | | RMB30,000 (RMB100,000 for one-person limited |
| capacity for civil conduct. Foreign individuals at or | | | | liability company) by the Company Law of the |
| above the age of 18 years old are qualified to be the | | | | People's Republic of China (revised in 2005), the |
| foreign partners if they are not mentally ill. | | | | Foreign Partnership Measures leave the minimum |
| Thresholds for Foreign Partnership | | | | investment open to the partners. The foreign |
| Some thresholds, such as the approval by the MOC, | | | | partners can contribute with the currency (freely |
| imposed on the FIEs are lifted for foreign partnership. | | | | exchanged foreign currency or legally earned RMB), in |
| This means that the foreign partnership and the | | | | kind, IPR, land use right, the other properties or labor |
| domestic partnership will be treated with unified | | | | service (limited to general partners) to the foreign |
| threshold in the aspect of approval, which will | | | | partnerships. All these will minimize the cost for |
| definitely reduce the criticism from the international | | | | foreign partners to achieve their goal of profit |
| community, but may cause more from the domestic | | | | maximization in China. But those enterprises focusing |
| public (including those FIEs). But it does not mean | | | | on the investment business, such as the |
| that there will be no thresholds review on foreign | | | | foreign-funded venture capital investment enterprises |
| partnership. | | | | and foreign-funded investment companies, are |
| Article 3 of the Foreign Partnership Measures lists the | | | | excluded from the Foreign Partnership Measures due |
| general thresholds for the foreign partnerships. The | | | | to lack of experience in administrating this kind of |
| establishment of foreign partnership shall abide by the | | | | enterprises by the government. |
| Partnership Law and the other relevant laws, | | | | The issue of the Foreign Partnership Measures has |
| regulations and rules, and comply with the industrial | | | | been waited for more than two years since the |
| policies for foreign investment. These general | | | | Draft was published in 2007 and received a widely |
| thresholds need to be analyzed together with the | | | | welcome. But its simplification with sixteen articles in |
| reference to the other relevant laws, regulations, | | | | only one and half pages remains some issues |
| rules and policies. | | | | unsolved and ambiguous to the foreign partners. The |
| First, the threshold provided by the Partnership Law | | | | foreign partners need also to consider more when |
| is the pre-approval on the business scope. Where the | | | | they make a decision on their option of partnership, |
| business cope of a foreign partnership contains any | | | | which may require the assistance from the legal |
| item, for example oil distribution, that is subject to | | | | professionals. |
| approval prior to registration according to laws or | | | | |