- The SAIC’s New Regulations related to FIP formation and operation aim to clarify several areas of uncertainty
As discussed in our December 2009 China Alert, “China Releases Rules Allowing Foreign-Invested Partnerships,” the State Council promulgated the Administrative Measures on the Establishment of Partnership Enterprises by Foreign Enterprises or Individuals (FIP Measures) in December 2009. The FIP Measures provide the legal framework for the formation of a foreign-invested partnership enterprise (FIP).
However, we also noted that many uncertainties with respect to the formation and operation of an FIP need to be clarified. In January and February 2010 the State Administration for Industry and Commerce (SAIC) released the Provisions on Administration of Foreign-invested Partnership Registration and a notice on the relevant issues with respect to the implementation of the FIP Measures (collectively, the New Regulations) to detail the new rules.
The FIP Measures state only that an FIP should comply with foreign investment policies. According to the New Regulations, establishment of an FIP that falls within the scope of “prohibited,” “cooperation only,” “joint investment and cooperation only,” “shares must be held by the Chinese party,” “certain number of shares must be held by the Chinese party” or “proportion of foreign investment restricted” as provided under the Catalogue on Guiding Foreign-Invested Industries is prohibited.
The permissible forms of capital contribution are unclear under the FIP Measures, which state only that contributed currency shall be freely convertible currency or RMB obtained lawfully. The New Regulations make it clear that in addition to cash the investments may be made in kind through intellectual property rights, land use rights or other assets. The value of such investments is determined by an agreement among all partners or based on an assets appraisal by a qualified assets-appraisal firm. In addition, the New Regulations allow general partners to contribute labor to the partnership.
According to the New Regulations, there are several scenarios in which the SAIC should consult the relevant authorities concerned before it approves the formation of the FIP: 1) entry into the industry in question falls under other authorities’ supervision or 2) entry is restricted in the Catalogue on Guiding Foreign-Invested Industries. In addition, if an FIP intends to invest in fixed-asset projects, an approval from a relevant development and reform commission will be needed. Except for these circumstances, the New Regulations provide that the SAIC should approve or reject registration applications within 20 days after such applications are accepted.
In summary, the New Regulations have clarified some uncertainties in the FIP Measures. With the implementation of the FIP Measures together with the New Regulations, it is expected that the authorities may formulate more detailed rules to cope with various problems in implementation of the laws and regulations regarding FIPs.