1、CHAMBERS GLOBAL PRACTICE GUIDESAlternative Funds 2022Definitive global law guides offering comparative analysis from top-ranked lawyersChina:Law&Practice Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian Global Law OfficeCHINA2CHAMBERS.COMLaw and PracticeContributed by:Yuan Yuan,Tony(Xianlai)L

2、iu,Jinghe Wang and Zhihong Jian Global Law Office see p.15Contents1.General p.31.1 General Overview of Jurisdiction p.32.Funds p.32.1 Types of Alternative Funds p.32.2 Fund Structures p.32.3 Funds:Regulatory Regime p.42.4 Loan Origination p.52.5 Non-traditional Assets p.52.6 Regulatory Approval Proc

3、ess p.62.7 Requirement for Local Investment Managers p.62.8 Other Local Requirements p.62.9 Rules Concerning Other Service Providers p.62.10 Requirements for Non-local Service Providers p.62.11 Funds:Tax Regime p.62.12 Double-Tax Treaties p.72.13 Use of Subsidiaries for Investment Purposes p.72.14 O

4、rigin of Promoters/Sponsors of Alternative Funds p.72.15 Origin of Investors in Alternative Funds p.72.16 Key Trends p.72.17 Disclosure/Reporting Requirements p.82.18 Anticipated Changes p.93.Managers p.103.1 Legal Structures Used by Fund Managers p.103.2 Managers:Regulatory Regime p.103.3 Managers:

5、Tax Regime p.113.4 Rules Concerning Permanent Establishments p.113.5 Taxation of Carried Interest p.113.6 Outsourcing of Investment Functions/Business Operations p.123.7 Local Substance Requirements p.123.8 Local Regulatory Requirements for Non-local Managers p.124.Investors p.124.1 Types of Investo

6、rs in Alternative Funds p.124.2 Marketing of Alternative Funds p.124.3 Rules Concerning Marketing of Alternative Funds p.134.4 Local Investors p.134.5 Investors:Regulatory Regime p.134.6 Disclosure Requirements p.134.7 Investors:Tax Regime p.144.8 Foreign Account Tax Compliance Act(FATCA)/Common Rep

7、orting Standard(CRS)Compliance Regime p.14CHINA Law and PracticeContributed by:Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law Office 3CHAMBERS.COM1.General1.1 General Overview of JurisdictionThe alternative investment funds industry in Chi-na is relatively new yet fast-growing co

8、mpared to many more developed regions in the West,with fewer than 20 years of history.Under the Chinese financial regulatory regime,oversight of the asset management industry is allocated to different regulatory bodies based on the asset manager or sponsors type of business.For example,financial ins

9、titutions in banking,insur-ance,securities,investment funds,futures and trusts each have their own respective regulator overseeing the business and operations of such financial institutions and the financial products(including alternative investment products)they issue or sponsor.This discussion on

10、alternative investment funds will mainly focus on private investment funds.In the past ten years,China gradually established and enhanced its private invest-ment fund legislation and regulatory regime,which facilitated a rapidly growing fund indus-try.To July 2022,there were more than 24,000 registe

11、red private fund managers and more than130,000 private funds filed with the Asset Management Association of China(AMAC),a self-disciplinary industry body under the Chi-nese securities regulator(the China Securities Regulatory Commission CSRC),with a total of CNY20.39 trillion in funds raised.2.Funds

12、2.1 Types of Alternative FundsIn accordance with the AMAC filing system,pri-vate investment funds can be classified into the following categories:venture capital funds(including funds of funds investing in underlying funds of the same type),which mainly invest in equities of private companies;privat

13、e equity funds(including funds of funds investing in underlying funds of the same type),which mainly focus on mergers and acquisitions of mature companies,private offerings of public securities,as well as real estate and infrastructure investment opportu-nities;private funds investing in public secu

14、rities(including fund of funds investing in underly-ing funds of the same type),which mainly invest in public securities(“private securities funds”);other types of private investment funds(including fund of funds investing in underly-ing funds of the same type)that invest in arts,wine,movies,etc;and

15、 fund of funds that invest in a portfolio of pri-vate equity funds,venture capital funds and private securities funds.2.2 Fund StructuresThe most commonly used fund structures in China include contractual collective investment schemes,limited partnerships and companies(including limited liability co

16、mpanies and com-panies limited by shares).Contractual Collective Investment Schemes(“Contractual Funds”or a“Contractual Fund”)Most private securities funds are established as contractual funds.The number of investors in a single contractual fund shall not exceed 200.Contractual funds are not conside

17、red legal entities and forming a contractual fund does not require registration with the business administration bureau.Instead,rights and obli-gations of all parties of the fund will be provided CHINA Law and PracticeContributed by:Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law

18、Office 4CHAMBERS.COMin the fund agreement.A contractual fund for-mation will become effective upon filing with the AMAC.Limited PartnershipsMost private equity funds and venture capital funds are established as limited partnerships in China.Funds established as limited partner-ships can have up to 5

19、0 investors in a single fund vehicle with a minimum of one general part-ner and one limited partner.The general partner bears unlimited liability and the limited partners assume liabilities and indebtedness of the lim-ited partnership to the extent of their respective capital contributions.Limited L

20、iability Companies or Companies Limited by SharesPrivate investment funds can be established in the form of limited liability companies or com-panies limited by shares.As China has a rela-tively advanced legal framework in the areas of company law and corporate governance,gov-ernment funded or spons

21、ored funds,or corpo-rate funds under state-owned enterprises may prefer the corporate form as their chosen fund structure.2.3 Funds:Regulatory RegimeChina has promulgated many laws and regu-lations covering the private investment fund industry,the most important of which are the following.Partnershi

22、p Law(2006)The implementation of the Partnership Law is particularly significant because it provided a clear legal foundation for the use of limited part-nerships for private investment funds.Securities Investment Fund Law(2015)The Securities Investment Fund Law,while mainly focusing on the regulati

23、on of mutual funds,includes a chapter on regulation of pri-vate securities funds.It provides that investors in a private investment fund must be Quali-fied Investors(as defined below)and the num-ber of investors in a single fund vehicle cannot exceed 200.The Securities Investment Fund Law provides t

24、hat a private investment fund can-not engage in fundraising with any investors who are not Qualified Investors or with the general public,especially through public media such as newspapers,television,radio and the internet or by way of general solicitation such as lectures,reports or seminars that a

25、re open to the pub-lic.It also provides that private investment funds can invest in publicly traded stocks,bonds,fund interests and other securities and derivatives as approved by the securities regulatory body of the State Council.Interim Measures for the Supervision and Administration of Private I

26、nvestment Funds(2014)(“Interim Measures”)The Interim Measures are the primary regulation on private funds and fund managers in China issued by the CSRC.Specifically,the Interim Measures provide that the fund managers should,upon completion of fundraising,file a private fund with the AMAC.The Interim

27、 Meas-ures further provide that a Qualified Investor is an entity or individual that is able to invest at least CNY1 million in investment interests of a fund and has the capacity for risk assessment and risk tolerance,and must meet the following net worth or income requirements:if the investor is a

28、 legal entity,it should have net assets of at least CNY10 million;or if the investor is an individual,they should hold at least CNY3 million in financial assets,CHINA Law and PracticeContributed by:Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law Office 5CHAMBERS.COMor have a perso

29、nal average annual income of no less than CNY500,000 for the last three years(“Qualified Investor”).The Interim Measures also require that fund managers and fund sales agencies should not make guarantees that there will be no loss of investment capital or of minimum returns.Guiding Opinion on Regula

30、tion of Asset Management Business of Financial Institutions(2018)(“the Guiding Opinion”)Asset management products issued by different types of financial institutions such as commer-cial banks,insurance companies and securities firms are overseen by different financial regu-lators under different set

31、s of rules and regula-tions.Therefore,the same type of fund products may be subject to different regulations issued by different regulatory authorities.The Guiding Opinion is aimed at consolidating the regulatory requirements of different financial regulators on the asset management products issued

32、by dif-ferent financial institutions(including their sub-sidiaries)to prevent opportunistic arbitrage due to policy differences.For the first time,the Guid-ing Opinion set forth requirements and restric-tions on asset management business under all financial institutions,such as limits on leverage ra

33、tios,a prohibition on multiple-layer structures and maturity mismatches,which significant-ly impacted the private fund industry.Several Provisions on Strengthening the Regulation of Private Investment Funds(2021)(“Several Provisions”)The Several Provisions upgraded regulations on private investment

34、funds and their fund managers by specifying a number of new rules.The Several Provisions emphasised that use of“fund”or“fund management”or similar phrases shall not be used without satisfying the requisite registration and filing requirements with AMAC.The Several Provisions further provide that ass

35、ets of private investment funds shall not be used for:providing loans,guarantees,or debt financ-ing disguised as equity financing(howev-er,assets of private investment funds can be used for short-term bridge loans or guaran-tees for portfolio companies with a term of no more than one year);investing

36、 in factoring assets,financial leasing assets,mortgage financing assets and other credit assets,or equity interests or other interests lined to credit assets;investments with unlimited liability;or other activities that are prohibited by applica-ble laws,regulations or the CSRC.Additionally,the AMAC

37、 has established rela-tively well-developed self-disciplinary rules for the regulation of the private fund industry from the fundraising stage to investments and exit of funds investments.2.4 Loan OriginationPrivate investment funds in China are not allowed to originate loans,except that private inv

38、estment funds can provide bridge loans or guarantees of a term of no more than one year to portfolio companies for the purpose of equity investment,provided that the total amount of such loans or guarantees shall not exceed 20%of the funds total capital commitment.2.5 Non-traditional AssetsCurrently

39、,Chinese regulatory authorities are rather prudent in their regulation of the types of assets private investment funds are allowed to invest in.Many non-traditional investment tar-gets such as cryptocurrency,credit assets,dis-tressed assets and rights to profit-sharing are CHINA Law and PracticeCont

40、ributed by:Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law Office 6CHAMBERS.COMnot eligible investment assets for private invest-ment funds.The regulations expressly prohibit private investment funds from investing in fac-toring assets,financial leasing assets,mortgage financing a

41、ssets,and other credit assets or equity interests or other interests lined to credit assets.2.6 Regulatory Approval ProcessOnce fundraising is completed,a private fund manager should submit the filing on behalf of the fund with the AMAC within 20 working days.Upon full and complete submission of fil

42、-ing materials,certain credible and reputable fund managers can complete the filing within the next working day through a fast-track process.For fund managers that do not enjoy fast-track sub-mission,it will take approximately two weeks to complete the fund filing process.2.7 Requirement for Local I

43、nvestment ManagersTo manage or to raise private investment funds domiciled in China,the fund manager must have a registered legal presence in China and obtain the requisite qualifications and registra-tions.2.8 Other Local RequirementsThe legal framework does not require private investment funds to

44、hire local employees or to have an actual place of business.The local sub-stance requirements,such as employee quali-fications and business premises,are aimed at private fund managers.2.9 Rules Concerning Other Service ProvidersOther fund service providers to private invest-ment funds in China,such

45、as custodians,appraisers and fund interest registration agen-cies,must be established in China and have obtained the requisite qualifications.In general,private investment funds in China shall engage a custodian to safeguard fund assets.Qualified commercial banks and securities firms are per-mitted

46、to provide custodian services to private investment funds.Other service providers,such as appraisers and registration agencies,are gen-erally securities firms with the relevant qualifica-tions.2.10 Requirements for Non-local Service ProvidersCurrently,service providers established outside of China o

47、r without the requisite qualifications are not allowed to provide services to private investment funds in China.2.11 Funds:Tax RegimeThe following tax regimes apply to alternative funds in China.Income tax In China,private equity funds are subject to differ-ent tax collection methods and tax rates d

48、epend-ing on the funds organisational structure.Funds in the form of limited partnerships are pass-through entities and thus investment pro-ceeds derived from the fund are distributed to investors without being subject to enterprise income tax at the fund level.If an investor is an entity,the invest

49、or will fulfil its own tax fil-ing obligations.If the investor is an individual,the fund will be obligated to withhold personal income tax on behalf of such individual at the rate of 20%or 535%as determined by local tax authorities.For contractual funds,because the fund itself is not a tax person un

50、der Chinese law,the fund or the investors of the fund are not subject to taxa-tion at the fund level.Instead,investors will be CHINA Law and PracticeContributed by:Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law Office 7CHAMBERS.COMresponsible for submitting their own tax filings

51、in relation to investment proceeds.For a private investment fund in the form of a company,profits from investment proceeds of the fund will be subject to a 25%enterprise income tax.For investors that are legal entities,distribution of proceeds as dividends from the fund will not be subject to double

52、 taxation.How-ever,for individual investors,distribution as divi-dends from the fund will be subject to 20%per-sonal income tax.If the investor of a private investment fund is not a Chinese tax resident,then proceeds dis-tributed to such an investor will be subject to a 10%withholding tax at the fun

53、d level or will be subject to tax at a higher rate if the non-tax-resi-dent investor is considered to have a permanent establishment in China through its investment in the private investment fund.Additionally,if such non-Chinese tax resident is an individual,then depending on different cases,the fun

54、d should withhold personal income tax from proceeds to be distributed to the investor at the rate of 20%or 535%depending on different cases.VAT Transfer of financial products(including stock or other securities),interest income and other financial assets are subject to value-added tax.2.12 Double-Ta

55、x TreatiesPrivate investment funds in China do not nec-essarily qualify for benefits directly under dou-ble tax treaties.Non-tax resident investors shall apply for tax benefits under double tax trea-ties on a case-by-case basis.2.13 Use of Subsidiaries for Investment PurposesIt is not a common pract

56、ice for private invest-ment funds in China to set up subsidiaries or SPVs to make investments.Most private funds invest directly into target companies(or other assets).Depending on the transaction structure and tax planning goals,private investment funds may occasionally establish downstream SPVs fo

57、r certain transactions.2.14 Origin of Promoters/Sponsors of Alternative FundsSponsors or promoters of private funds domiciled in China must establish a registered legal pres-ence in China and register with the AMAC as private investment fund managers.Foreign promoters or sponsors cannot engage in ma

58、n-agement of a private fund in China directly from an offshore entity.Additionally,foreign hold-ers of equity in the promoters/sponsors/manag-ers of Private Securities Funds must satisfy cer-tain regulatory requirements.2.15 Origin of Investors in Alternative FundsInvestors in private investment fun

59、ds in China are mainly Chinese institutional and individ-ual investors.In accordance with regulations on Qualified Foreign Limited Partners(QFLP),approved private fund managers can spon-sor and manage QFLP funds which are private investment funds invested by foreign inves-tors.The origins of foreign

60、 investors are quite broad and may vary from fund to fund.2.16 Key TrendsGovernment guidance funds have become increasingly active in the fundraising activities of private equity funds and venture capital funds.According to the public information,in 2021,the number and scale of government guidance C

61、HINA Law and PracticeContributed by:Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law Office 8CHAMBERS.COMfunds established increased by 77%and 207%respectively,which have become the most active force in the private equity funds market and one of the most significant sources for the

62、 fundraising of private equity funds and venture capital funds.In terms of the type of private funds,second-ary funds(“S funds”)have become increasingly active recently.The main reason behind this trend is that private funds in China boomed during 2010-15,and as the term of these funds is com-ing to

63、 an end,investors in these funds are under pressure to exit their investments therefore cre-ating more demand in the market.As China gradually loosens its foreign exchange control policies,foreign investors are see-ing more opportunities to participate in Chinese domestic private funds.Meanwhile,dom

64、es-tic CNY private funds are increasingly active in cross-border or foreign investments in recent years.Some private fund managers who used to man-age a single type of asset are seeking to broad-en the scope of assets and product types under their management.Many fund managers started to deploy mult

65、iple investment and asset man-agement strategies,including different invest-ment stages,objectives and different product types.Industries such as technology,advanced manu-facturing,healthcare and clean energy are more favoured by investment funds as government-encouraged industries.There is a strong

66、 trend towards investing in early-stage enterprises,small enterprises and the technology industry.According to the public information,in 2021,the number and scale of new investments in small/medium enterprises,high-tech enterprises,start-up science and technology enterprises made by private equity f

67、unds and venture capital funds have reached a record high.The number and scale of new investments in industries such as semiconductor,network information,biologi-cal medicine and new energy are at the forefront of the investments within all industries.As to the regulation and self-disciplinary trend

68、s,the reform to streamline administration and del-egate power,improve regulation and upgrade services has been further enhanced.By issuing the list of registration and management of pri-vate fund managers,the main points of private investment fund filing,making public the regis-tration handling proc

69、edures of private fund man-agers,the AMAC has improved the transparency of registration/filing and the service quality.By expanding the scope of application of the sepa-rate channel for the filing of funds,in which funds can be filed upon reporting,the AMAC has sub-stantially improved the efficiency

70、 of fund filing.In terms of policies,by promoting pilot innovations,such as the transfer of partnership interest of private equity funds/venture capital funds and the distribution of stock in kind by private equity funds/venture capital funds,the exit methods of private equity funds/venture capital

71、funds are expected to become more diversified.2.17 Disclosure/Reporting RequirementsPrivate fund managers and custodians bear the obligation to make disclosures to the inves-tors in relation to the fund.Mandatory disclosure requirements of the fund managers(and fund custodians)include:fund contract;

72、private placement memorandum(PPM)and other fund promotional documents;CHINA Law and PracticeContributed by:Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law Office 9CHAMBERS.COM the main rights and obligations included in the fund sales agreements(if any);summary of fund investments

73、;fund balance sheet;fund investment return distribution;fund expenses and incentive fees;potential conflicts of interest;material litigation or arbitration involving fund management,fund assets and the fund cus-todian;and other material information as determined by the CSRC and AMAC to have a materi

74、al impact on investors rights.During the fundraising period,the following information should be included in the fund pro-motional materials(such as the PPM):fund basic information fund name,fund structure(master-feeder structure,parallel funds),fund type,place of establishment(if any),target fund si

75、ze,minimum subscription amount,close-end or open-end(or other liquidity window provisions),fund term,con-tact persons and contact information,fund custodian(if any);basic information on the fund manager fund managers name,fund structure(such as whether it is a master-feeder fund,or a parallel fund),

76、type of fund,place of registra-tion/place of business,fund size,minimum subscription amount,open-ended or close-ended(liquidity window),fund term,contact person and contact information,fund custo-dian(if any);fund investment information fund invest-ment objective,investment strategies,invest-ment di

77、rection,performance benchmarks(if any),risk/return profile,etc;fundraising duration first closing date and final closing date(if any);fund valuation policy,procedures and valua-tion model;main fund terms including terms on capital contribution,distribution of proceeds,loss allocation,management fee

78、calculation and payment,fund expenses,fund reports and financial statements;fund subscription and redemption;and statement on creditworthiness of the fund manager from the last three years.During a private investment funds opera-tion,the fund manager should provide periodic reports to investors.The

79、fund manager should also report to investors prompt-ly upon the occurrence of material changes in the fund or fund manager.Information disclosure shall be made in accordance with provisions of the fund agree-ments.Fund managers should also make appro-priate periodic filings and disclosures in connec

80、-tion with the fund and fund manager as required by the AMAC through the AMACs online filing system.However,disclosures made by pri-vate investment funds shall not be made to the public.2.18 Anticipated ChangesThe Regulations on the Supervision and Admin-istration of Private Investment Funds is stil

81、l under consideration and is not yet formally issued.The draft for public opinion of this upcoming regu-lation shows that it will impose heavier penal-ties for regulatory violations.CHINA Law and PracticeContributed by:Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law Office 10CHAMB

82、ERS.COM3.Managers3.1 Legal Structures Used by Fund ManagersAs China has a relatively well-developed com-pany law legal framework,fund managers usu-ally use limited liability companies as the pre-ferred legal form.Due to tax planning and other business considerations,some private fund managers also c

83、hoose limited partner-ships as their legal form.3.2 Managers:Regulatory RegimeRegistration Requirements In accordance with the Interim Measures,pri-vate fund managers are subject to registration requirements before they can sponsor a private investment fund or engage in any fundraising activities.Th

84、ere are certain qualifications and substance requirements that a fund manager must satisfy in order to successfully obtain reg-istration status with the AMAC.Additionally,pur-suant to the Announcement on Several Matters concerning Further Regulating the Registration of Private Investment Fund Manage

85、rs(2016),a private fund manager applicant must engage a Chinese law firm to issue a legal opinion on whether the applicant is eligible for application of registration and whether the applicant satisfies all the application requirements.The legal opin-ion is one of the most important documents that t

86、he AMAC will review to determine whether the applicant meets the registration requirements.Restrictions and Limitations on Business Activities of a Fund Manager Private fund managers must include the fol-lowing language in their legal and business names:“private investment fund manager”,“pri-vate in

87、vestment fund”,“venture capital invest-ment”,and include words indicating the type of asset management business in the businesss scope such as“private investment fund man-agement”,“private securities investment fund management”and“private equity investment fund management”.Private fund managers can

88、only promote and market funds to specific Quali-fied Investors without engaging in a public offer-ing or general solicitation.During their marketing and promotional activities,private fund manag-ers cannot make statements to the effect of any promise of return or safety of investment capital to the

89、investors.Each private fund manager can only manage a single type of private fund(see 2.1 Types of Alternative Funds).A private fund manager shall not engage in any business unrelated to or conflicting with private fund management such as lending,providing guar-antees or factoring.Additionally,a pri

90、vate fund manager shall not manage any fund that has not completed its filing with the AMAC.Private fund managers shall also establish effec-tive internal control systems to prevent conflicts of interest and other unethical conduct.Substance Requirements See 3.7 Local Substance Requirements for subs

91、tance requirements of private fund manag-ers.Wholly-Foreign Owned or Joint-Venture Private Securities Fund Managers The Questions and Answers on Registration and Filing of Private Investment Funds(Number 10)for the first time clarified the requirements for set-ting up a wholly-foreign owned private

92、securities fund manager or a foreign-Sino joint venture pri-vate securities fund manager in China.The main requirements for setting up private securities fund managers with foreign equities include:the private securities fund manager applicant should be a company established in China;CHINA Law and P

93、racticeContributed by:Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law Office 11CHAMBERS.COM each foreign shareholder of the private securities fund manager should be a licensed financial institution or a financial institution approved by the financial regulator in its home jurisdi

94、ction,and the financial regulator of its home jurisdiction should have entered into a memorandum on collaboration on the securities regulation with the CSRC or another regulatory body designated by the CSRC;and the private securities fund manager and its foreign shareholders must not have been subje

95、ct to significant penalties by the relevant regulators or enforcement agencies.Currently,there are no specific regulatory requirements on the foreign shareholders of the private equity fund manager.3.3 Managers:Tax RegimePrivate fund managers in the form of compa-nies are subject to enterprise incom

96、e tax and VAT.The enterprise income tax rate is 25%of the companys profit(including management fees and any performance incentive fees),and VAT is taxed at 6%and is applicable to manage-ment fee revenue and other incomes received from the fund in the form of fees,such as per-formance incentive fees.

97、Private fund managers in the form of limited part-nerships are considered tax pass-through enti-ties and are not subject to enterprise income tax(while incomes received in the form of fees are still subject to VAT).Management fees and car-ried interest received by the limited partnership manager wil

98、l be distributed to the non-individual partners which will in turn make their own tax fil-ings.For individual partners,the limited partner-ship manager will withhold individual income tax at the rate of 5%-35%based on the amount of proceeds received.3.4 Rules Concerning Permanent EstablishmentsThere

99、 are no clear rules on whether foreign investors investing passively in a private fund domiciled in China with no participation in the management and operation of the fund will be deemed to have a“permanent establishment”in China.Therefore,if such foreign investors are considered to have“permanent e

100、stablishment”through their investment in a private fund in China,they may be subject to a tax rate higher than the 10%withholding tax by the Chinese tax authorities.For fund management teams that manage both offshore funds and onshore China-domiciled funds,there could be poten-tial questions as to w

101、hether the same manage-ment teams presence in China will constitute“permanent establishment”of the offshore fund and fund manager.There are no well-established rules in China as to what constitutes an exemp-tion to“permanent establishment”.However,in practice,offshore funds and fund managers should

102、ensure that they do not have a perma-nent business presence in China,and that the investment decisions and operations of the off-shore funds are carried out in an offshore juris-diction to avoid being deemed to have“perma-nent establishment”in China.3.5 Taxation of Carried InterestThere are no speci

103、fic rules applying to taxa-tion of carried interest.If a company is the receiving entity of the carried interest,the com-pany is subject to 25%enterprise tax on its profits for the year.If a limited partnership is the entity receiving carried interest,because limited partnership is treated as a pass

104、-through entity,carried interest will be taxed at the partner level of the limited partnership.For individuals receiv-ing carried interest from a partnership entity,the partnership will withhold tax at the tax rate of 20%or 5%-35%,depending on whether the CHINA Law and PracticeContributed by:Yuan Yu

105、an,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law Office 12CHAMBERS.COMlocal tax authority deems the carried interest as proceeds derived from an equity transfer or from income of business operations.3.6 Outsourcing of Investment Functions/Business OperationsThe Chinese legal framework all

106、ows private fund managers to outsource some of the fund management and operation functions,such as the fund assets custodian,valuation and fund interest registration.The service provid-ers should be institutions legally established in China with the requisite qualifications.3.7 Local Substance Requi

107、rementsTo register as a private fund manager in China,the applicant must satisfy the following require-ments.The applicant should have a minimum of five full-time employees(working part-time or full-time in other capacities is generally not allowed and senior executives should not work at an un-affi

108、liated fund manager),including investment personnel and risk con-trol personnel with commensurate experience and capabilities.The legal representative and compliance(risk control)officer should be qualified as a fund industry practitioner.If applying for registration as a private securities fund man

109、ager,all senior executives(including legal representatives,executive partners(general partners),general managers,vice presidents and compliance officers)should be qualified as fund industry practitioners.The applicant should have an independent place of business that meets the business needs of its

110、operations.The applicant should have enough capital for its business operations,the minimum of which should be no less than CNY2 million.The applicant should have a comprehensive internal control system.3.8 Local Regulatory Requirements for Non-local ManagersCurrently,the Chinese legal framework doe

111、s not allow foreign private fund managers to sponsor or manage private funds domiciled in China.4.Investors4.1 Types of Investors in Alternative FundsChina has the following common types of inves-tors:government guidance funds;social security funds and pension funds;insurance companies;different typ

112、es of asset management invest-ment funds;corporate investors;and high net worth individuals.4.2 Marketing of Alternative FundsUnder the Chinese legal framework,private fund managers can promote and market funds to specific Qualified Investors without engaging in public offering or general solicitati

113、on.Please see the definition of“Qualified Investor”in 2.3 Regulatory Regime.The following investors are deemed to be“Qual-ified Investors”:social security funds,pension funds and charitable foundations;investment funds legally established and filed with the AMAC;fund managers and their staff when in

114、vest-ing in the fund under their management;and CHINA Law and PracticeContributed by:Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law Office 13CHAMBERS.COM other investors as determined by the CSRC.Foreign investors investing in domestic CNY funds in China may be subject to higher

115、investor subscription standards as local rules and regula-tions on QFLPs may vary.4.3 Rules Concerning Marketing of Alternative FundsMarketing and sales of private investment funds can only be made to specific Qualified Investors in private placement without engaging in pub-lic offering or general s

116、olicitation.The following conduct is strictly prohibited:offering fund interests to investors other than Qualified Investors,or aggregating mul-tiple investors who taken individually are not qualified,in an attempt to qualify in the aggregate,or loaning money to investors who are not qualified in an

117、 attempt to increase their assets such that they would appear to be Qualified Investors;promoting and marketing fund interests through public media such as newspapers,radio,television and the internet,or promot-ing and marketing fund interests to the gen-eral public;promising the safety of investmen

118、t capital or guaranteeing investment returns directly or indirectly,orally or in writing by text mes-sages,instant messages,etc;promoting and marketing fund interests in exaggerated fashion or through deliberately misleading one-sided statements;promoting the investment objectives of the fund to inv

119、estors differently from what was provided in the fund agreements;including false statements,misleading state-ments or material omissions in marketing materials;engaging in misleading promotional activi-ties,including using registration status,financial institution custodian or government funding to

120、enhance credibility;engaging agencies or individuals who do not have fund sales qualifications to provide fundraising services;establishing subsidiaries to engage in fund-raising activities(including the establishment of covert subsidiaries);and other conduct prohibited by any law,regula-tion or the

121、 CSRC.4.4 Local InvestorsA Chinese individual or entity that is a Quali-fied Investor can invest in alternative funds in China that suit the investors risk tolerance.4.5 Investors:Regulatory RegimeOnce a private fund manager obtains registra-tion status with the AMAC,it can engage in mar-keting and

122、sales of fund interests in accordance with applicable laws and regulations without any additional filings.If the fund manager engages a placement agen-cy to conduct fund marketing and sales on its behalf,such placement agency must have the requisite fund sales qualifications.4.6 Disclosure Requireme

123、ntsIn accordance with investor suitability require-ments,the fund manager should obtain the fol-lowing information from its investors:basic information on the investor,such as name,address,profession,age,contact information,name of legal entity,registered address,business address,nature and quali-fi

124、cation of business,and business scope;CHINA Law and PracticeContributed by:Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law Office 14CHAMBERS.COM source of income and amount,amount of assets and debt,and other financial informa-tion;investment-related education,work and investment

125、experience;investment objectives such as investment term,investment type and investment expec-tations;risk appetite and risk tolerance;credit history;ultimate control person of the investor and ultimate beneficiary of the investment;other disclosure requirements as provided by laws,regulations and i

126、ndustry self-disciplinary rules;and other information as deemed necessary.To verify if an investor satisfies the Quali-fied Investor test,investors will provide certain information in relation to their legal status and qualifications,finances and assets.For investors in the form of limited partners

127、and contractual arrangements,investors will be required to pro-vide information as to their investors and interest holders unless an exception applies.Investors are also required to provide informa-tion regarding their identity and source of fund-ing to comply with anti-money laundering regu-lations

128、.With respect to CRS reporting obligations,inves-tors are also required to provide certain informa-tion in relation to their tax residency.4.7 Investors:Tax RegimeIf the private investment fund is established as a limited partnership or a contractual fund,an investor in the form of a company will be

129、 sub-ject to 25%enterprise income tax on its overall annual profits.An individual investor investing in such a fund will be subject to 20%or 535%tax(which will be withheld by the fund)as determined by local tax authorities for the pro-ceeds derived from their investment in the fund.If the private in

130、vestment fund is established as a company,an investor in the form of a com-pany will not be subject to enterprise income tax again for the proceeds distributed to the investor as dividends derived from its invest-ment in the fund.An individual investor in such a fund will be subject to 20%individual

131、 income tax for proceeds distributed to the investor as dividends received from the fund.In general,non-Chinese tax residents that are foreign entities will be subject to a 10%withhold-ing tax for the proceeds derived from investment in private investment funds in China,or they will be subject to a

132、higher tax rate if such investor is considered to have a permanent establishment in China through its investment in the private investment fund.Foreign individual investors will be subject to 20%or 535%individual income tax,as determined by local tax authorities,which will be withheld by the fund.4.

133、8 Foreign Account Tax Compliance Act(FATCA)/Common Reporting Standard(CRS)Compliance RegimePrivate investment fund managers are required to implement a CRS review process in connection with their investors.CHINA Law and PracticeContributed by:Yuan Yuan,Tony(Xianlai)Liu,Jinghe Wang and Zhihong Jian,G

134、lobal Law Office 15CHAMBERS.COMGlobal Law Office(GLO)dates back to 1979 and is now known as one of the leading Chinese law firms,with more than 500 lawyers practising in the Beijing,Shanghai,Shenzhen and Cheng-du offices.GLO is recognised as one of the best PRC firms in investment funds practice and

135、 in private fund business.The firm provides com-prehensive and full-coverage legal services for clients in the formation,funding,management,investment and exit of private funds.Its team represents fund managers participating in ne-gotiations with various investors,which include mainstream institutio

136、nal investors in the market.GLO completes fund investment on behalf of in-stitutional investors,and provides high-quality and efficient private fund manager registration,significant event change and private fund filing legal services for a range of private fund man-agers.It also offers legal service

137、s relating to compliant operation,internal governance and team motivation of private fund management institutions.AuthorsYuan Yuan is a partner at Global Law Office based in Beijing.She has represented various international and leading domestic investment institutions regarding private equity(PE)/ve

138、nture capital(VC)investment funds design and formation.Yuan represents various top-tier investment institutions and PE/VC funds.She assists renowned managers of PE/VC funds in the design and formation of their first and subsequent series of CNY funds in the Chinese market and is also active in speci

139、al investment vehicles for various types of projects.Her practice also focuses on advising PE/VC fund managers on matters of private equity management institutions compliance management,internal governance arrangements and economic incentives.Tony(Xianlai)Liu is a partner at Global Law Office based

140、in Beijing.He specialises in investment fund,private equity(PE)/venture capital(VC),M&A,capital market and dispute resolution.Tony has over 15 years of experience in investment fund and VC areas.He has extensive knowledge of the Chinese PE/VC market and previously worked as the general counsel of Ne

141、w Horizon Capital,one of the top PE funds in China.Tony regularly attends meetings of the Asset Management Association of China(AMAC),the supervisor of PE/VC fund industry,to analyse new rules and provide advice on the monitoring of investment funds.CHINA Law and PracticeContributed by:Yuan Yuan,Ton

142、y(Xianlai)Liu,Jinghe Wang and Zhihong Jian,Global Law Office 16CHAMBERS.COMJinghe Wang is a partner at Global Law Office based in Beijing.He specialises in private equity(PE)/venture capital(VC)and investment funds practice.With over 10 years of experience in this area,Jinghe has represented various

143、 international and domestic leading investment institutions regarding PE/VC investment funds design and formation as well as investment vehicle-related matters.He has advised many funds,insurance companies and start-ups on many minority equities investment/financing,M&A and mezzanine investment matt

144、ers with significant transaction values.Zhihong Jian is a partner at Global Law Office based in Beijing.He specialises in private equity(PE)/venture capital(VC)and investment funds practice as well as investment and financing.Zhihong has extensive experience in investment fund structure,negotiations

145、 with investors and other legal issues related to fund formation.He also represents various top-tier investment institutions and PE/VC funds.He provides legal services regarding registration of investment fund managers,fund filing and other compliance-related matters.In addition to representing a la

146、rge number of general partners,Zhihong represents a large number of limited partnerships looking to invest in various investment funds.Global Law Office(Beijing)15&20/F Tower 1 China Central Place No 81 Jianguo Road Chaoyang District Beijing 100025 China Tel:+86 10 6584 6688 Fax:+86 10 6584 6666Emai

147、l:Web:CHAMBERS GLOBAL PRACTICE GUIDESChambers Global Practice Guides bring you up-to-date,expert legal commentary on the main practice areas from around the globe.Focusingon the practical legal issues affecting businesses,the guidesenable readers to compare legislation and procedure and readtrend forecasts from legal experts from across key jurisdictions.To find out more information about how we select contributors,emailKatie.B