China's Partnership Enterprise Law Revised

By Paul McKenzie and Fraser Mendel, Morrison & Foerster LLP

The Partnership Enterprise Law, originally promulgated on February 23, 1997, was amended on August 27 2006 by the Standing Committee of the National People's Congress (NPC). The amended Partnership Enterprise Law (the Revised Partnership Law), will come into effect on June 1 2007.

The Partnership Enterprise Law attracted limited attention when promulgated in 1997 due to its inflexibility - only natural persons could be partners, the partnership was taxed as an enterprise and the partners themselves were taxed on their income, a partnership enterprise did not enjoy limited liability, and the implications of the bankruptcy of a partnership were unclear. The Revised Partnership Law addresses these problems, and also provides several additional advantages. Under the revised law, a range of legal entities are eligible to be partners, a degree of limited liability can be achieved, and there are clear rules for the handling of bankruptcy. The law also confirms that partnerships are eligible to be taxed on a pass-through basis. In addition, the Revised Partnership Law adds two new forms of partnership to the original general partnership enterprise: the special general partnership enterprise (SGP) and the limited liability partnership enterprise (LP). It is widely anticipated that the ability to establish SGPs will promote the development of professional service firms in China, while the availability of LP structures will enhance the development of onshore investment funds, consistent with the PRC government's longstanding goal to cultivate the growth of venture capital and private equity in China.