China Partnership Law

The often amended PRC Partnership Law was passed by the Standing Committee of the National People's Congress together with the PRC Enterprises Bankruptcy Law on August 27, 2006.  It took effect on June 1, 2007.  The new Partnership Law split partnerships into two categories  i.e. General Partnerships and Limited Partnerships and contained several important changes.  

The law was silent regarding the subject of foreign participation in domestic partnerships and referred to future measures on the administration of partnerships established by foreign parties which will be published separately by the State Council.  

 Foreign Investor Partnerships
The revised Partnership Law applies to foreign investor enterprises.

This is a short summary of the new Partnership Law.  General Partnerships must have a minimum of two general partners.  General partners may make contributions in the form of currency, materials, intellectual property, land use rights, or services.  General partners are burdened with unlimited joint liability for the obligations of the partnership.  State-owned companies, state-owned enterprises, listed companies, public institutions and social organizations cannot be general partners in order to avoid the complete loss of state-owned assets at the expense of minority shareholders.
General partners may appoint one or more partners to operate the partnership with the consent of all partners or subject to the partnership agreement.  Voting rights must comply with the partnership agreement.  However, if the partnership agreement does not contain clear voting provisions, each partner shall have one vote and the resolution will be passed if it is approved by a majority of partners.  The Partnership Law provides that partners cannot engage in or cooperate with others who operate a business directly competitive with the general partnership.  In a general partnership, partners may not do business with the partnership unless the transactions are approved under the partnership agreement or all partners consent.

Special General Partnerships
According to the new Partnership Law, a professional firm such as legal or accounting firm may form a Special General Partnership (“SGP”). Partners bear unlimited individual or joint liability for debts.  If the SGP incurs a debt as a result of one or more partners' intentional actions or serious negligence, the responsible partner assumes liability for the debt or if two or more partners are responsible, they each assume unlimited joint liability. Other partners are only liable for their contributions to the SGP.

However, all partners assume unlimited joint liability for the SGP's debts which result from unintentional actions, or which result from something other than negligence in a partner's practice. The Partnership Law requires SGP’s to establish a fund to offset operational debts pursuant to measures issued by the State Council and to purchase professional liability insurance.  This new form of SGP will change the operation of domestic law and accounting firms.  

Limited Partnerships
The Partnership Law also provides for a Limited Partnership which requires one or more general partners to assume unlimited joint liability for the partnership's debts and to operate the partnership while other partners have limited liability for their contributions.  Limited partners are not allowed to make contributions in the form of services, nor are they permitted to manage the partnership.  Unless otherwise prohibited in the partnership agreement, limited partners may transact business with the partnership and operate a similar business.  The Partnership Law controls the liability of new limited partners and the conversion rights of partners between general and limited partner.
The new Partnership Law includes provisions regarding income taxes on partnerships.  Article Six of the Partnership Law makes partnerships not liable for the enterprise income tax but imposes income tax on each partner for revenues from partnership business.  Regulations will be published by the State Administration of Taxation to specify tax rates and the implementation of this new policy.

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