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Partnership Enterprise Law of PRC (17/04/2007)

1. What is the new limited partnership system?

Limited Partnerships may be established under the new law, which, on the condition that there is at least one partner willing to assume unlimited liability, allows the other partners to benefit from limited liability. In addition, the New Partnership Law specifically sets out the type of capital contribution which may be made by limited partners, including contribution in money or in kind – for example, in intellectual property rights, land use rights or other property assets. The contribution must also be recorded in the registration of the enterprise in order to protect the rights and interests of creditors.

The limited partnership system is designed to be conducive to the development of risk carrying investments by allowing the institutions or individuals with experience in management and abilities in technology research and development to combine effectively with investment institutions.


2. What is the new special general partnership?

The New Partnership Law contains a section entitled “Special General Partnership Enterprises”, which specifies that, subject to a general condition that partners will assume unlimited liabilities for the debts of the partnership, partners would not assume unlimited liabilities on a joint and several basis for liabilities incurred to the partnership due to reasons attributable to any other partner(s). At the same time, the New Partnership Law narrowly defines the scope of the exemption to liabilities incurred by the partnership due to other Partners’ willful misconduct or gross negligence.

In addition, to supplement the limitation on the scope of partners’ assumption of unlimited liabilities for liabilities of the partnership, the New Partnership Law has introduced a protection system for clients and third parties. It requires special general partnership enterprises to maintain a risk reserve fund and obtain malpractice insurance to cover potential risks incurred by partners.


3. Can legal persons participate in the partnership?

The new law expressly defines the partnership enterprise, so that legal persons may participate in partnerships. This system is intended to allow legal persons, including companies, to realize their intended target undertaking using the advantages of partnership enterprises – including a flexible form, effective cooperation, and relatively low costs. This system is also intended to be conducive to the cooperation between large size enterprises and innovative middle and small-size enterprises. Meanwhile, in order to prevent the risks that state-owned enterprises and listed companies may assume due to participating in the partnership, and to protect the national interests, public interests, and the interests of shareholders, the New Partnership Law stipulates that such institutions may not become general partners.


4. Can partnership enterprise go bankrupt?

The New Law permits creditors of partnership enterprises to make choices under different circumstances, namely that the creditors may apply to the people's court for bankruptcy liquidation or may demand the partners to make repayments. Where a partnership enterprise is declared bankrupt, the general partners will still bear unlimited joint and several liabilities for the debts of the partnership enterprise.

The new system ensures that all creditors are repaid in proportion, which helps the creditors’ interests. Meanwhile the act of illegal transfer of property within the year prior to the bankruptcy of the enterprise may be withdrawn, and the transferred property may be recovered, so that the bankruptcy property is increased and the creditor’s interests are
protected.


5. Does partnership enterprise need to pay income tax?

In order to prevent partners from evading the obligation to pay taxes by not distributing the profits of the enterprise, the New Law sets forth, “for production and business operation incomes and other incomes of a partnership enterprise, partners must pay their respective income tax in accordance with the relevant tax provisions.”


6. How does the law prevent the issue of illegally raising funds?

In order to prevent raising funds illegally through the limited partnership system, the New Law, by reference to the relevant provisions of the Company Law of the PRC, provides that a limited partnership enterprise must be established by not less than 2 but not more than 50 partners, unless it is otherwise provided by law.

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