CHINA Law and Practice Contributed by: Alan Du and Yiwei Shi, King & Wood Mallesons
2. Alternative Investment Funds 2.1 Fund Formation 2.1.1 Fund Structures Most private funds in the PRC are structured as limited partnerships or contractual funds. Although funds can be formed as limited compa - nies, in practice limited company funds are rela - tively rare because they are generally less tax- efficient, and the PRC’s Company Law does not support the concept of a “management share”, as is available in some other jurisdictions and which gives the holder of a management share similar powers to a general partner. Private Securities Investment Funds Private securities investment funds typically take the form of a contractual fund. The main com - petitive advantages that a contractual fund has over a limited partnership are as follows. • A contractual fund can have up to 200 inves - tors, whereas a limited partnership only allows up to 50 partners. • A contractual fund is not a legal entity that needs to be registered with the enterprise registration authority, the Administration for Market Regulation (AMR). Therefore, its sub - scription and redemption processes are more efficient, without needing to go through the registration process. • The fund manager of a contractual fund does not withhold the income tax for individual investors as a matter of general practice, whereas a limited partnership fund must with - hold income tax for individual investors.
• The PRC’s Partnership Law is flexible, and a limited partnership fund can accommodate most of the international practice of private equity funds. • In examining a company looking to launch an IPO, the CSRC generally treats a shareholder in the form of a contractual fund as problem - atic as it is hard to trace the beneficial owners behind the contractual fund. Therefore, a fund with a strategy of exiting from its portfolio companies by way of an IPO will be formed as a limited partnership, instead of as a con - tractual fund. Contractual fund Due to the difficulties of listing real estate com - panies or assets in China, a real estate fund’s exit strategy usually excludes an IPO or secu - ritisation, and therefore it may be formed as a Some of the funds funded by state-owned enter - prises (SOEs) may use the form of a limited com - pany. The PRC’s Partnership Law provides that an SOE shall not act as the general partner; but, in practice, an SOE under the Partnership Law is interpreted in a narrow way – eg, the subsidiary of an SOE may be exempted. However, some SOEs may still prefer a fund in the form of a limited company, where no SOE will need to act as the general partner. Fund managers Most private fund managers are structured as limited companies, though some may be struc - tured as limited partnerships. contractual fund. Limited company
Private Equity Funds Limited partnership
In the PRC, most private equity funds are struc - tured as limited partnerships, for the following reasons.
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