In the News
October 23, 2006
China Amends Partnership Enterprise Law
China’s legislature amended the Law of the People’s Republic of China on Partnership Enterprises (Partnership Enterprise Law) on August 27, 2006. The new law will become effective on June 1, 2007. Compared with the old law, the new law contains the following distinct features:
1. Under the new law, a limited partnership enterprise (LPE) with at least one general partner and one limited partner can be formed. The number of partners in a LPE may not exceed 50. A limited partner enjoys limited liability but must not take part in running the partnership business.
2. Under the new law, companies including foreign-invested companies or other entities may become partners of a partnership enterprise except for state-owned enterprises, listed companies, and nonprofit organizations that can only be limited partners of a LPE.
3. The new law clarifies that income tax will pass through a partnership enterprise, whether a general partnership enterprise (GPE) or a LPE, thereby avoiding double taxation.
4. Entities providing professional services, such as law firms, accounting firms and auditing firms, may take the form of a special general partnership enterprise (SGPE). A partner of a SGPE should take unlimited liability for any debt resulting from his willful act or gross negligence while the liability of other partners may be limited to their capital contributions. The new law further requires that an SGPE set up a risk fund and purchase professional liability insurance.
5. The State Council is authorized to promulgate the rules on the partnership enterprises formed by foreign companies or individuals.
China and Hong Kong Sign Tax Pact
China and Hong Kong signed a new tax pact on August 21, 2006. The agreement, similar in form to a tax treaty, ensures that business profits will not be double taxed in both places. It covers both direct income, such as operating profits and employment income, and indirect income, such as dividends, interests and royalties. The tax withholding for dividends that a Hong Kong business receives from its mainland investments will be reduced from 10 percent to 7 percent. This rate can be further reduced to 5 percent if the business holds at least 25 percent of the enterprise’s capital in the mainland of China.
Once ratified, the pact will take effect on January 1, 2007. This tax pact will enhance both Hong Kong’s competitiveness in attracting overseas capital and its potential as the strategic gateway to the mainland of China.
Proposed U.S. China Export Control Rules
On July 6, 2006, the Bureau of Industry and Security (BIS) proposed Revision and Clarification of Export and Re-export Controls for the People’s Republic of China (PRC). It includes a new control based on knowledge of a military end-use on exports to the PRC of certain items on the Commerce Control List. BIS also proposed to establish a new authorization for Validated End-User (VEU) as part of the Export Administration Regulations to facilitate legitimate exports to civilian end-users. This new authorization, VEU, will be for Chinese entities only. For a Chinese firm to become a VEU, it must submit the following information, attesting to a range of bona fides to the U.S. government, as part of the determination process for consideration of VEU status:
1. the candidate company’s record of “exclusive engagement in civil end-use activities”
2. the candidate company’s compliance with U.S. export controls
3. the candidate company’s record of not contributing to the proliferation of weapons of mass destruction
4. the candidate company’s record demonstrating that it is not engaged in activities contrary to U.S. national security or foreign policy interests
5. the candidate company’s agreement to on-site compliance reviews and audits by representatives of the U.S. Government, Office of Export Enforcement
6. the candidate company’s “relationships” with U.S. and foreign companies
For more information, e-mail Kai Yang at kai.yang@hklaw.com or call toll free, 1-888-688-8500.