(FIPE) Foreign Invested Partnership Enterprise

Posted on Posted in Business, Money

 

In Mainland China, there are 4 modes of business presences for foreign investors:FIPE

  • WFOE (65 %)
  • Representative Office (20 %-)
  • FIPE (10 %+)
  • Joint Venture (5 %)

FIPE becomes more and more popular among young entrepreneurs with their new startups in China as it requires no registered capital but the FIPE still could hire people, collect payments, issue invoices, apply for work & residence in China freely. It's not a surprise that most people you meet in China may not know anything about FIPE as its relative new and government does not promote this.

Introduction to Partnership Enterprise (PE)

A partnership enterprise is a type of business entity in which partners share with each other the profits or losses of the business undertaking in which all have invested. Since June 1, 2007, Partnership Enterprise Law came into force and established partnerships as a legal business entity, Foreign Enterprises or Individuals establish Partnership Enterprise is not allowed only until March 1, 2010.

The term partnership enterprise refers to general partnerships and limited partnerships which may be established within China by individuals, legal persons and other organizations. A state-funded company, state-owned company, listed company, public welfare-oriented public institution or social organization may not become a general partner of a limited partnership.

Investors of Partnership Enterprise

The Minimum number of partners should be 2. There's no requirements on the nationality of a Partner, thus it can be all foreign investors to form a FIPE or Foreign and Chinese partners mixed FIPE. 

Concept of FIPE

(FIPE) stands for Foreign Invested Partnership Enterprise, an unlimited liability business entity set up by more than 2 (including 2) foreign enterprises or individuals; or by foreign enterprises or individuals and Chinese individual, legal person and other organizations within the territory of China.

FIPE is an entity without minimum requirements on registered capital. A partnership in the People's Republic of China is a business entity governed by the Partnership Enterprise Law passed by order of the President of the People's Republic of China to authorize and govern partnership enterprises.

Types of Foreign Invested Partnership Enterprise (FIPE)

There are three types of FIPE as following:

  1. Limited Partnership Enterprise (LPE): A limited partnership enterprise is formed by a combination of general partners and limited partners where the limited partners bear the liabilities for the partnership's debts to the extent of their capital contributions.
  2. General Partnership Enterprise (GPE): A general partnership enterprise may be formed by general partners who bear unlimited joint and several liability for the debts of the partnership. The general partners share unlimited liabilities for the debt of the partnership.
  3. Special General Partnership Enterprise (SGP): A special general partnership enterprise resembles a general partnership except that it must be a professional service institution offering services requiring professional knowledge and special skills.

The structure shields co-partners from liabilities due to the willful misconduct or gross negligence of one partner or a group of partners. It is very similar to limited liability partnership in Europe and America.

Conditions of a FIPE

A partnership enterprise must meet the following requirements:

  1. At least 2 or more partners.
  2. A written partnership agreement.
  3. Capital contribution subscribed to or actually paid by the partners.
  4. A business name and an office in an office building for the partnership enterprise.

Advantages of Establishing a FIPE

The advantages of establishing a PE, compared with other types of enterprises, include, but not limited to:

  1. No requirements on minimum registered capital.
  2. Less procedures comparing with Wholly Foreign Owned Enterprise or Joint Venture.
  3. No corporate income tax for partnership enterprise.
  4. It permits men possessing different kinds of abilities to unite, thereby increasing efficiency.
  5. It makes possible the employment of larger capital, which, as we shall see later, contributes to increased production.
  6. Foreign Enterprise or Individual is allowed to establish a Partnership Enterprise with Chinese individual (While Chinese individual is not allowed to have Joint Venture with foreign investor).
  7. Capability of converting RMB profits to US dollars for remittance to its parent company outside of China.
  8. The profit distribution of a PE could follow an informal negotiated agreement or abide by scheme adopted in the partnership agreement (While for LLC, profit distributions are according the percentage of investment of shareholders).

Disadvantages of Establishing a FIPE

  1. Compared with the single enterpriser the partnership is at a disadvantage in the matter of business policy and authority. Unlike a single enterpriser, the member of a partnership must share more or less authority with others.

Consequently, as often happens, the partners work at cross purposes, one advocating one business policy, a second advocating a different policy, while a third partner may disagree with both policies. Oftentimes, under such circumstances, it is found desirable to dissolve the partnership.

  1. Unlimited liability; A partnership must pay all its debts with property contributed to the partnership by the partners. If the partnership is a general partnership then the partners bear joint and several liabilities.
  2. As for trading business of a PE, since PE is not a general tax payer, PE can't get VAT status, and can't apply for VAT rebate accordingly.
  3. Property rights of partnership enterprise is difficult to be transferring to a third party as according to the Partnership Enterprise Law: the property rights of partnership transfer MUST be agreed by all partners in a PE.
  4. China has not adopted Natural Person's Bankruptcy system, credibility of the partners would be hard to maintain if PE involves into a hard situation.
  5. Limited business names options: Can't have business name with "Company" in it, i.e.; can't have name XYZ Co., or XYZ Co., Ltd. and could only choose names like: XYZ Firm (Partnership enterprise) or XYZ Center (Partnership enterprise).

Capital Contribution

A partner may contribute capital to the partnership to garner a share of the partnership's profits or losses. The form of a capital contribution can be money, land use right, intellectual property right or other properties, or labor services at a valuation determined by agreement among the partners. However, labor services cannot be the capital contributions in a limited partnership.

Distribution

The default distribution scheme of profits or losses follows the proportion to capital contributions made by the partners. However, the distribution scheme may follow an informal negotiated agreement or abide by a scheme adopted in the partnership agreement.

If the proportions of capital contributions cannot be discerned, then the profits or losses will be distributed equally by the partners. The partnership agreement may not distribute all losses or all profits to just one or a group of partners within the partnership.

Documents Required for FIPE Registration

  1. Application Form for Foreign Invested Partnership Enterprise Registration signed by all partners.
  2. For corporate investor as partner: 1x Certificate of Incorporation, or Articles of formation or equivalent document certified by Chinese embassy or Chinese consulate overseas.
  3. Partnership Agreement signed by all partners. This written agreement must be submitted to the State Administration of Industrial & Commerce along with the certified passport copy of the partners.
  4. Certificates on the legal status of all partners or their identity certificates if they are natural persons. Residential Address Proof (e.g. utility bill issued within 3 months, valid driving licenses with address, National Identity card with address, etc.) be certified by Chinese embassy or consulate.
  5. For individual investor as partner: Passport copy certified by Chinese embassy or consulate.
  6. Passport copy of: (i) Parent company's director (ii) China Partner Enterprise's general partner and (iii) China Partner Enterprise's partners.
  7. China general partner and partners provides:
  • 6 photos (2 inches size).
  • Brief resume.
  • Registered capital.
  • Business Scope.
  • 8 proposed Chinese names of China business.
  1. Original Bank Reference Letters from investor’s bank (declare a good standing) certified by Chinese embassy or consulate (Managing partner only).
  2. Proof of Business Premises.
  • Office address in China.
  • Leasing contracts (x2).
  • Certificate of real estate ownership (x2) and
  • Landlord identification (x2).
  1. Power of Attorney of the designated representative or entrusted agent.
  2. The confirmation letter in which all partners confirm the subscribing or the actual capital paid by each partner.
  3. An explanation which explains the FIPE is in conformity with the industrial policies on foreign investment.
  4. Other materials as required by government.

General Tax Information

There is no corporate income tax in a FIPE. The partners shall pay their respective share of the partnership income.

Profit Repatriation

China Government allows Foreign Invested Partner Enterprises remit their profits out of the country and such remittances do not require the prior approval of the State Administration of Foreign Exchange (SAFE). Dividends cannot be distributed and repatriated overseas if the losses of previous years have not been covered while dividends not distributed in previous years may be distributed together with those of the current. Repatriating the Registered Capital to home countries is forbidden during the term of business operation.

Terms and Termination

In China, terms of 15 to 30 years are typical for a PE. It is also possible to obtain extensions of the PE's duration.

Accounting for FIPE

Once the FIPE is officially registered, it's required to maintain proper accounting records in accordance with accounting standards in China and report taxes in monthly (for business tax, individual income tax) basis. The late submissions will face penalty and surcharges.

A PE must register with the local tax authority for tax reporting method and applying for official invoice book which allow the PE to issue invoice to its clients within China and abroad.

Details are set out below and a sample fee schedule is set out in "Form B"

  1. Update the books of FIPE in accordance with the Chinese Accounting Standards.
  2. Prepare monthly financial statements for tax filing purpose and submit if applicable.
  3. File monthly Business Tax Return and Individual Income Tax Return.
  4. Audit of Financial Statements [if applicable].

Detailed Breakdown of Fees

The figures shown in the table below are estimations.

Form B:

No. Services Period Separate Costs Package Cost
01 Update the books of accounts Monthly 1,500RMB/Month 22,000RMB/Year
02 Business Tax Filing Monthly
03 Individual Income Tax Filing Monthly
04 Annually License Renewal Annually
05 Audit of Financial Statements Annually 6,000RMB/Year

 

Social Security in China

A rule on foreign employees’ social security took effect starting October 15, 2011, states that if a company hires a foreign employee, the company shall register this employee with the local social security authority within 30 days of the employee receiving their work permit.

For all Services connected to FIPE

Hangzhou Office:

E-mail: grace.lim@pathtochina.com [or Request for Proposal]

Hangzhou Liaison Office: Suite 4202, 4/F, Euro America Center [-MAP-]

18 Jiao Gong Rd., Hangzhou 310007, China

Regional Consultant: Ms. Grace Lim

Tel: (8621) 6218-9991 GMT+8 (English and Mandarin)