2020.05.02 Natasha XIE、QIN, Tianyu、YANG, Yuxiaoxiao
From the beginning of this year, Shanghai has been steadily reinforcing the opening up in various financial areas. On March 13 and April 27, the Shanghai government published two articles on its official Wechat account named “Shanghai Finance” regarding recent developments in the area of Qualified Foreign Limited Partnership (QFLP) Pilot Program (i.e., foreign-invested equity investment enterprise pilot). On April 27, Mr. LI Jun, the deputy director-general of the Shanghai Municipal Financial Regulatory Bureau (SFRB) introduced in the press interview that Shanghai has already broadened the scope of the QFLP Pilot Program. Mr. Li mentioned three feasible models (“Models”) of the QFLP Pilot Program: Model 1: foreign fund manager managing US dollar-denominated funds; Model 2: foreign fund manager managing RMB-denominated funds; and Model 3: domestic fund manager managing US dollar-denominated funds. We understand that Model 1 is the original model of the QFLP Pilot Program and Models 2 and 3 are new models developed based on Model 1.
Besides the new developments of QFLP Models, Mr. Li also mentioned that Shanghai will support QFLP pilot enterprises to broaden their investment scopes from equity investment to investment in preferred shares, private equity placement, convertible bonds, mezzanines and non-performing loans (NPLs), which echoed the article published by “Shanghai Finance“ on March 13, stating that after a couple of years of trial the Shanghai QFLP Pilot Program has already been established as a mature path for foreign asset managers to participate in the China NPL markets through formation of funds, and CarVal Investors has been approved by the Shanghai authorities to raise offshore funds for investment in domestic NPL markets. The article also mentions that a couple of renowned foreign asset managers are now applying for a QFLP qualification for investment in domestic NPL markets.
With the above developments, we believe that foreign asset managers that are interested in exploring such new opportunities may find the following helpful to understand the features and procedures of the QFLP Pilot Program.
(1)Introduction of Shanghai QFLP Pilot Program: The QFLP pilot program in Shanghai has been steadily developed since its official rollout in 2010. The initial intention of the program was to allow foreign asset managers to establish a QFLP fund management company (either a WFOE or a JV) and a QFLP fund vehicle to make private equity investments in China. A QFLP fund management company may invest through a QFLP fund vehicle by using the capital raised offshore, and additionally by using capital raised onshore if the same manager has been registered as a private equity fund manager with the Asset Management Association of China (AMAC).
(2)Application Process. The QFLP application process generally involves three steps:
(i)Submitting application materials to the SFRB. Documents to be submitted mainly include an application report, relevant documents about the applicant, the QFLP fund manager and the QFLP fund to be established (e.g., the set-up structure, investment size, potential investment projects).
(ii)Being reviewed by the Joint Conference. The Joint Conference is composed of the SFRB, the Municipal Commission of Commerce, the Municipal Administration for Market Regulation (“Shanghai AMR”) and the Shanghai Branch of the State Administration of Foreign Exchange, responsible for reviewing the application materials and making a final decision as to whether to approve the application. Note that the Joint Conference may be held irregularly.
(iii)Setting up a QFLP fund manager and a QFLP fund. The setting up of the QFLP fund manager normally takes about two months (excluding the time for opening bank accounts). The QFLP fund is established in a partnership form and shall complete the Shanghai AMR registration formalities within six months after receiving the approval for the QFLP pilot qualification.
Before foreign investors may invest in China NPL markets via QFLP pilot program, NPL WFOE (wholly foreign-owned enterprise) can be established in Shanghai by foreign investors for NPL investment purposes. Compared with the NPL WFOE model, NPL investment via QFLP pilot has the following two advantages. Foreign asset managers may select a model that is most suitable to their needs.
(1)Lower tax burden: It is generally considered that the gains derived by foreign limited partners from its investment through a QFLP fund may be subject to lower tax burden than investing through an NPL WFOE, though the effective tax burden may vary due to variations in practices in different localities;
(2)Broader investment scope: The investment scope of an NPL WFOE is limited to those business scope items approved by the competent authority (e.g., asset management; investment management; investment advisory; acquisition, operation, management and disposal of non-performing assets purchased from financial asset management companies and local asset management companies), while the QFLP fund may be allowed to invest in NPL market generally. Note that the specific investment scope for a QFLP fund shall be approved on a case-by-case basis.
We will continue to monitor the situation and keep our clients apprised of any important developments.
1.《新一批全球资产管理机构落户上海》posted on Shanghai Finance on March 13, 2020(http://jrj.sh.gov.cn/Category/Detail?informationid=158629);
2.《看好上海，外资股权投资热情不减》posted on Shanghai Finance on April 27, 2020;
3. JunHe Client Briefing: Shanghai or Shenzhen? Considerations in the Choice of Location for QFLP Funds (November 27, 2018) (http://www.junhe.com/law-reviews/877).