The Next Iteration of China's Partnership Enterprise Tax Guidance*

January 1, 0001


This proposed guidance affects inbound Chinese investment structures, including the taxation of foreign invested RMB funds in China (including QFLPs). Though the draft of follow-up guidance to Circular 159 has yet to be finalised, one thing is certain: the draft lays down the beginnings of an actual framework that deals with taxation issues for EIT taxpaying partners in partnership enterprises.

The Ministry of Finance (the “MOF”) and the State Administration of Taxation (the “SAT”) issued the last item of normative guidance for partnership enterprises (合伙企业) and their partners back in 2008 in the form of Caishui [2008] No. 159 (“Circular 159”). Circular 159 was unique in that it stated the “allocate first, then tax (先分后税)” principle in the context of the individual income tax (“IIT”) and the enterprise income tax (“EIT”). Apart from that, Circular 159 merely set out principles for partners to determine their distributive share of income from partnership enterprises and indicated that losses from partnership enterprises cannot be utilized against other income of the partners. Guidance prior and subsequent to Circular 159 is limited and quite fragmentary.

This article examines the working draft of follow up guidance to Circular 159. The draft circular EIT Issues of Partners and Partnerships (国家税务总局关于合伙企业合伙人企业所得税问题的通知) appears to mark the first major step for more comprehensive guidance in this area, at least for EIT purposes. One version of the working draft is attached as an appendix for reference (the “Draft”). While the Draft is undoubtedly subject to substantive revisions before issue, the authors believe some discussion of the concepts that appear to be emerging is relevant. This is partially due to the delay in the drafting process for the new guidance and the dearth in the current state of guidance given the larger numbers of partnership enterprises now in operation having partners subject to the EIT. These include private equity funds and other businesses now being established in the form of partnership enterprises.

Scope Issues

One immediate critique of the Draft is the decision to only cover EIT issues from the standpoint of partners in a partnership enterprise who are subject to the EIT. As the discussion below will show, fragmented guidance for partnership enterprises is problematic. The authors believe that truly comprehensive guidance would not only jointly cover EIT and IIT issues of the partners but also partnership level issues. Addressing EIT and IIT separately presents numerous conflicts and inconsistencies and the lack of partnership enterprise level guidance leaves many important issues unaddressed. Issuing truly comprehensive guidance may be difficult to realize in practice due to reasons of tax bureau level authority and coordination between the different taxes and legal entities. As a result, the authors expect that the principles from each fragmented piece of guidance may get shared or borrowed as a matter of practice.

Contributions of Property to Partnership Enterprise

The Draft does establish a non-recognition rule for contributions of property to newly formed and existing partnership enterprises. However...  

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* This article was first published in the October 2012 edition of China Tax Review, reprinted with permission from the publisher.  

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