CHINA Law and Practice Contributed by: Zhen Chen, Candy Tang, Flora Qian and Yan Zhao, Fangda Partners
in managing offshore funds (eg, Hony Capital, and CDH). Over time, domestic sponsors have become important players in the RMB fund market in terms of both numbers and AUM size. Currently, fund spon - sors focus on different areas and can be subdivided based on their expertise. For instance, more state- owned or governmental fund managers are formed to manage government-backed guidance funds. S fund sponsors, buyout fund sponsors, etc, are booming to meet the growing demand for secondary transactions, fund restructuring and buyout deals. 3.2 Legal Structures Used by Managers Sponsors in China usually adopt one of the two major legal structures: a limited partnership or limited liability company. A private fund manager intended to operate primarily as a cost centre typically takes the form of a limited liability company. If the private fund manager plays roles in team members’ incentive plans, it may adopt the form of a limited partnership owing to the tax transparency inherent in partnership structures. 3.3 Regulatory Regime for Managers Overall, private fund managers are regulated by the CSRC and AMAC, the major institutional regulator and industrial self-regulator of the private funds sector. AMAC carries out daily supervisory functions under the authority of the CSRC. • AMAC Registration: Private fund managers must be registered with AMAC before carrying out any fundraising activities in China. Private fund manag - ers need to meet specific qualifications related to capital, experience, professional credentials, and integrity. Key personnel must pass relevant exams and pass the background checks. Legal opinions issued by a Chinese law firm to confirm the qualifi - cations, as well as other supporting evidence need to be submitted to AMAC, accompanying other application materials for the AMAC registration. • Reporting and Ongoing Compliance: Private fund managers must comply with CSRC and AMAC rules in their operation, including fundraising, investment management and their own internal governance. They are required to report to AMAC periodically, as well as upon the occurrence of any material change.
• Regulations Imposed by Special Investors: Some investors, particularly those regulated by other authorities (eg, insurance companies, government- backed guidance funds), may impose additional qualification and reporting requirements on the fund managers, the investment management teams and the fund managers’ operation. In addition, some other regulatory authorities are involved in regulating private fund managers, includ - ing: • Local Financial Bureau, Local CSRC Bureau or Other Local Authorities of Similar Function: Private fund managers are classified as “investment-relat - ed enterprises” and their establishment is usually subject to the local authorities’ pre-endorsement, depending on the relevant local regulatory practice. • Local AMR, Local Tax Authorities and Other Local Authorities: AMR is the enterprise registration authority in China, and like other entities, a private fund manager needs to make registrations with the local AMR to obtain its business licence and record material changes. After its AMR formation registra - tion, it needs to obtain tax registrations and several other ancillary registrations with other local authori - ties. 3.4 Tax Regime for Managers Private fund managers in the form of a limited liability company are subject to a 25% corporate income tax. Private fund managers in the form of a limited partner - ship are considered an income tax-transparent entity, meaning their income and gains are passed through to their partners. Corporate partners pay a 25% cor - porate income tax, while individual partners generally pay a progressive individual income tax rate ranging from 5% to 35%. In addition to income tax, a 6% VAT is applied to man - agement fees received by the private fund manager, regardless of whether it is a limited partnership or a limited liability company. Expenses related to fund management are deductible, and certain special pref - erential policies (often in the form of financial rewards) may apply under specific conditions.
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