Partnerships in China: The New Frontier

Recent improvements in the laws governing business entities signal a new phase in China’s progress toward a more flexible investment environment. These improvements include China’s amended Partnership Enterprise Law (PEL), enacted in 2006 and effective from 1 June 2007.

Before the PEL entered into effect, a partnership could only have individual partners and was thus of little interest to most domestic and foreign investors. In contrast, under the new law, a partnership may not only have partners that are domestic legal entities, but also foreign partners, whether individual or corporate. The Chinese government has clearly gone to considerable lengths to review partnership laws in other countries with a view to creating a flexible Chinese partnership vehicle and is to be applauded for its efforts.

This article analyses the various types of partnership entities and the opportunities offered. The authors also discuss the tax issues affecting such entities, specifically on real estate sector, such as:

• Double vs. single taxation - avoiding dividend withholding tax
• Existence of an “Establishment” - effect on taxation
• Employment vs. business income - reducing personal tax rates
• Non-resident partner deductible expenses
• Contributions of property and services to partnerships/inside-outside basis.