Partnership rules hailed as a lure for foreign funds
Tax breaks now available to China investment funds that are structured as partnerships offer a 'breakthrough' that could unlock a flood of new capital into the mainland, financial consultancy Deloitte Touche Tohmatsu forecasts.
On December 2, the State Council formally issued long-awaited measures for foreign enterprises and individuals to establish partnerships in China. The country is allowing for the first time foreign firms and individuals to form partnerships - structures that could substantially reduce income tax rates.
'In the past, foreign firms couldn't form partnerships in China. Now foreign partnerships will be allowed to invest in China,' said Deloitte principal Alan Tsoi Shu-yan.
'This is a major breakthrough. It offers foreign investors a new investment opportunity that will increase China's foreign direct investment. We have many foreign clients who have great interest in forming partnerships in China.'
The new rules will apply from March 1 next year.
At present, foreign firms operating in China, whether as joint ventures or wholly owned foreign enterprises, are not allowed to form partnerships but must be registered as companies.
Corporate income is taxed at a rate of 25 per cent, and a further withholding tax of 10 per cent is applied to distributed profits - reduced to 5 per cent for Hong Kong shareholders if their ownership in the company is greater than 25 per cent.
A partnership is a business operation in which partners share in profits and losses and is often a favoured structure because partnerships in many countries such as the United States and Britain generally do not incur taxes on profits before they are distributed to the partners.
The new measures allow partnerships to be established by two or more foreign enterprises or individuals, or by foreign enterprises or individuals and Chinese enterprises or individuals.
There will be no minimum capital requirement.
Many of Deloitte's foreign clients that had expressed interest in forming partnerships were financial companies and investment funds wanting to set up local-currency funds in China, said Tsoi.
'This will open the door for them to enter China with [yuan] funds.'
If foreign funds set up joint ventures and wholly foreign-owned enterprises in China, they would have to pay corporate income tax of 25 per cent, which represents a deterrent since taxes are too high and returns too low.
'But this new law will attract more foreign funds to China,' said Tsoi.
Under the new measures, partners would still have to pay income tax, but at a reduced rate not yet determined, said Tsoi, who estimates the tax rate at 10 to 20 per cent.
Under a law enacted in 2006, Chinese firms are allowed to form partnerships, but until now foreign firms could not do so.
'The measures are the most significant development in this area since the Partnership Law [which allows domestic partnerships in China] was introduced in 2006,' said a Deloitte paper by Tsoi and his colleagues.
Such partnerships are not allowed by law in Hong Kong, said Tsoi, and in this sense China is now more advanced than Hong Kong.
Partnerships are allowed in Britain and the US, where they attract zero income tax. Hong Kong-registered companies have to pay a corporate income tax rate of 16.5 per cent, while the maximum US corporate income tax rate is 35 per cent.
'The new law is not 100 per cent perfect. There are a lot of areas with room for improvement,' Tsoi said, noting that it is not clear on the repatriation of profits to foreign partners.
