According to the Circular on Commercial Registration Issues of Equity Investment Firms in Shanghai Municipality (the “Circular”) jointly issued by the Financial Service Office, State Taxation Bureau, Administration for Industry and Commerce, and Local Taxation Bureau of Shanghai Municipality on 11 August 2008, foreign investors including private equity, venture capital and hedge funds can now register in Shanghai as local equity investment firms. This move signals Shanghai’s efforts in acquiring the status as a major private equity centre after Tianjin and Beijing. Tianjin and Beijing have already allowed foreign investment funds to acquire “legal status” locally.
Prior to the Circular, due to the lack of clarity in regulations, foreign investment funds have established their PRC presence as a consultancy service or representative office rather than a full fledged investment firm. Foreign investment funds with an initial registered capital (in monetary form only) of not less than Rmb 100 million can now obtain legal status in Shanghai as a local equity investment firm.
Equity investment firms formed as a company limited by shares or as a partnership shall have no more than 50 shareholders or partners; whereas firms formed as a non-listed joint stock limited company shall have no more than 200 shareholders. Equity investment firms are to be registered with the local administration of industry and commerce of Shanghai.
Equity investment firms registered in Shanghai will be subject to taxation in accordance with the Enterprise Income Tax Law. For firms which are established as limited partnerships, their natural person general partners are subject to a 5%-35% tax rate under the Individual Income Tax Law. Natural person limited partners are subject to a 20% tax rate on capital gains pursuant to the Individual Income Tax Law.
Equity investment firms are required to disclose their annual reports to their investors (shareholders or partners). Their financial statements are to be audited. Assets of equity investment firms which are formed as a limited partnership should be placed in custody with a bank carrying on custodian business, in order to safeguard the assets of the partners.
The Circular encouraged the relevant government authorities in Pudong New Area to develop its own regulations based on the contents of the Circular to further promote the development of equity investment entities in Pudong New Area.
Despite gaining “legal status”, equity investment firms in Shanghai are still subject to foreign investment and foreign exchange control regulations.
For the full text of the Circular please refer to http://www.sgs.gov.cn/getPubInfo.action?pi.id=12955
Please click here for our English translation of the full Circular