In order to encourage private equity investment activities in Shanghai, in August 2008, the Shanghai government issued the Circular on Issues Concerning the Registration of Equity Investment Enterprises with the Shanghai Administration of Industry and Commence. The Circular formally allows the establishment of equity investment enterprises (EIEs) and equity investment management enterprises (EIMEs), and expressly provides for their business registration in Shanghai.
The Circular refers to EIEs as enterprises whose main business is equity investments and refers to EIMEs as enterprises engaged by EIEs whose main business is the management of equity investments. According to the Circular, both EIEs and EIMEs may take the form of a limited liability company, joint stock company, or partnership. The Circular permits both PRC and foreign individuals, legal persons or other organizations to be investors of EIEs and EIMEs.
According to the Circular, the minimum registered capital or capital contribution for an EIE is RMB 100 million, which may only be contributed in cash. The minimum cash contribution by an individual investor of an EIE is RMB 5 million. For an EIME, the minimum registered capital is RMB 5 million if it is established in the form of a joint stock company and RMB 1 million if it is established in the form of a limited liability company. In addition, if an EIE takes the form of a limited liability company or a partnership, the maximum number of investors is 50.
The Circular also clarifies individual income tax requirements for individual investors of limited partnership EIEs and EIMEs. According to the Circular, each individual general partner of an EIE or EIME is subject to individual income tax at a progressive tax rate ranging from 5 to 35 percent, while each individual limited partner is subject to a flat 20 percent income tax rate.
Finally, the Circular prescribes that the assets of limited partnership EIEs must be under the custody of custodian banks.
It is expected that the Shanghai government will issue further rules on the transfer of equity or partnership interests in EIEs and detailed measures to grant preferential treatment to EIEs and EIMEs in Shanghai’s Pudong New Area.