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Legal Update

RMB Funds - An Update

11 December 2009
Mayer Brown JSM Legal Update

The Administrative Measures for the Establishment of Partnership Enterprises by Foreign Entities or Individuals in China were issued by the State Council on 2 December 2009.

Pursuant to the Measures, it is now possible for private equity funds, in the form of foreign invested partnerships governed by PRC law, to be registered with local offices of the State Administration for Industry and Commerce without the approval of the Ministry of Commerce. Foreign investors can now participate in RMB Funds by either establishing a new partnership, or acquiring an interest in an existing partnership, governed by PRC law.

A partnership can now include a general partner and limited partners incorporated or established under laws other than PRC law.

However, a number of aspects remain unresolved. For example, the Measures do not provide foreign investors structuring PRC focused funds with any reassurance that a private equity fund formed as a foreign invested partnership will be treated any differently from other foreign invested enterprises with respect to the NDRC's prohibitions and restrictions on foreign investment in certain industries in the PRC. In relation to the conversion of foreign currency denominated capital contributions and repatriations to foreign partners, it is not clear whether international norms can be applied to facilitate fund flows.

From a tax perspective, it is clear that a partnership is transparent but the current tax rules do not clarify whether the activities of the general partner in the PRC will result in foreign limited partners being treated as having a permanent establishment in the PRC and therefore subjecting their distributions to PRC tax.

We expect these and other aspects to be clarified upon publication of rules and regulations in 2010, specifically for RMB Funds, pursuant to Article 14 of the Measures.

The Measures come into force on 1 March 2010.

For inquiries related to this Client Alert, please contact:

Phill Smith ( )

Learn more about our PRC offices and Financial Services Regulatory & Enforcement practice.

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