Foreign Invested Partnerships as an option to enter the Chinese market

By Richard Hoffmann, ECOVIS Beijing China

The Chinese market has opened itself more and more for foreign investors.

At first only Joint Ventures were a possible option for foreign companies to start business in China. Then Wholly Foreign Owned Enterprises with a 100% foreign ownership have been made possible. Since 2010, the third pathway into China is the “Foreign Invested Partnership” (FIP), whose partners can either be already existing companies or individuals.

Setting up a FIP can be easier than the foundation of a WFOE or a JV. This is the case since there is neither a minimum requirement for the registered capital nor a legal time frame for the capital injection. Besides the amenities in setting up a FIP, it also has some advantages in business operations. A FIP is usually an unincorporated business, which means that it does not have to pay any Corporate Income Tax on its profit.

Moreover, a partnership enjoys a great range of flexibility. As such, they are free to decide on their management structure, on announcing or denouncing partners, on hiring workforce directly and on profit distribution. Nevertheless, the main disadvantage for ordinary partnerships is that all partners are fully liable, which also includes their personal assets. If one partner wishes to be only liable within the dimensions of his/her capital contribution, he/she can join the partnership as a liable partner. In return this partner would be no legal representative of the company. In practise the limited liable partners are often the capital contributors for the business.

Due to these facts, it is said that FIPs are a good basis for young, creative and financially weak investors who are given the possibility to reach their goal with the help of a financially strong partner. Even if this all sounds very good, in practices, it is not always easy to set up FIP’s. In some locations it can be a quite complex as the authorities are not familiar with this relatively new type of entity.