Planned relaxation of US regulations will allow American foreign investment enterprises (FIEs) operating in China to achieve much greater net returns on mainland investments. The proposed changes, likely to be introduced later this year or early next year, will allow FIEs to establish themselves as partnerships much more easily. Under US laws, FIEs operating as partnerships, can more readily defer US taxation than corporations. There is serious doubt in the present investment environment as to whether FIE's operating in China can be structured as partnerships. Whether an entity is treated as a partnership or a corporation is determined by four basic characteristics. These are whether the entity has limited liability, free transferability of ownership, continuity of life and centralised management. Entities which have three or more of these characteristics are classified as being corporations. However, if they had just two of these features, they have been classified as partnerships. According to Price Waterhouse international tax partner Anthony Tong King-yan, this has meant entities which wished to establish as partnerships have been forced to try to manipulate the definitions. 'It has been quite difficult. Entities have had to play with the characteristics so as not to have at least two of the four necessary corporate features,' he said. This involved manipulating memorandums of understanding, articles of association and joint-venture agreements - something which had tended to be a costly exercise, he said. If the proposed rules are passed, manipulations of characteristics by FIEs - including wholly foreign-owned enterprises, equity joint ventures and co-operative joint ventures - will no longer be necessary. 'Taxpayers can elect to treat the entity as a corporation or a partnership - except for certain specified entities who will be automatically treated as a corporation.' Mr Tong said. This is likely to encourage further US investment and make returns on existing investments more attractive. The IRS is holding a public hearing next month, where entities will make submissions as to whether they agree with the changes. Mr Tong believes the changes finally will be implemented early next year. Such a time frame for final implementation would be quicker than most similar IRS proposals in the US. This was because of what was believed to be almost universal corporate support for the proposed move, Mr Tong said.