Foreign Participation in Onshore RMB Private Equity Funds

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2009 Paul, Hastings, Janofsky & Walker LLP Confidential - not for redistribution
4 Option II: Indirect Participation

CONFIDENTIAL – ATTORNEY WORK PRODUCT/NOT TO BE COPIED OR FORWARDED
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2009 Paul, Hastings, Janofsky & Walker LLP Confidential - not for redistribution
CONFIDENTIAL – ATTORNEY WORK PRODUCT/NOT TO BE COPIED OR FORWARDED
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2009 Paul, Hastings, Janofsky & Walker LLP Confidential - not for redistribution
CONFIDENTIAL – ATTORNEY WORK PRODUCT/NOT TO BE COPIED OR FORWARDED
Foreign Participation in Onshore RMB PE Funds
December 2009
CONFIDENTIAL – ATTORNEY WORK PRODUCT/NOT TO BE COPIED OR FORWARDED
Why are RMB Funds Hot?
4 Large amount of RMB available for investments 4 Gets around Foreign Exchange Control hussles 4 Sourcing of Chinese targets by Chinese LPs 4 Vehicle for Outbound investment 4 Chinese government ready to relax US-style
Current Overview (Cont’d)
4 New Option: Direct Participation “Administrative Measures for the Establishment of Partnership Enterprises by Foreign Entities or Individuals in China” --- has been released by the State Council However, draft “Provisional Measures on Administration of Equity Investment Funds” is being abolished (NDRC)
Current Structure: Relevant Issues
4 Business scope of Management WFOE
Management WFOE as a holding vehicle of GP Subsidiary.
4 Re-investment by Management WFOE as a
Current Structure (3-tier)
Foreign Fund Manager Offshore
100%
PRC Management WFOE
100%
GP Subsidiary
Unlimited Liability Management Arrangement
LP
LP
LP
Limited Partnership Fund
CONFIDENTIAL – ATTORNEY WORK PRODrrent Structure: Procedures
4 Establishment of Management WFOE 4 Establishment of GP Subsidiary (Enterprise Re-
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2009 Paul, Hastings, Janofsky & Walker LLP Confidential - not for redistribution
(Cont’d)
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Dynamics among NDRC, MOFCOM, CSRC and SAFE
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2009 Paul, Hastings, Janofsky & Walker LLP Confidential - not for redistribution

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Relevance on Japanese Investors
4 Get to work with the world’s global fund
managers for excellent opportunities in China 4 Have direct access to best sourcing resources in China 4 Get to represent a RMB-based fund to invest in Japan opportunities
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Current Structure: Relevant Issues
4 Taxation GP Subsidiary and LPs will be subject to enterprise income tax (25%) and business tax (5%). (Dividend distribution (after-tax net profits) from GP Subsidiary exempted from enterprise income tax) 4 Tax on Management WFOE Asset management fees and incentives subject to enterprise income tax and business tax Dividend distribution to the foreign parent further subject to withholding tax
Current Overview
4 Option I: Non-legal Person Foreign-Invested Venture Capital
Enterprise (“FIVCE”)
Structure similar to partnership Pro: Tax pass-through Cons: (i) Not applicable to real estate (ii) No forex conversion at FIVCE level Deregulation in 2009: Establishment of FIVCE with total investment < US$100 million to be approval at provincial level (instead of central MOFCOM) Current Status: Few approved in Shanghai Pudong: At least 10 Foreign-Invested Management Companies approved for incorporation 3-tier Structure Key Issue: foreign exchange conversion
“limited partnerships” 4 Timeliness of transactions 4 Less tax and costs
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2009 Paul, Hastings, Janofsky & Walker LLP Confidential - not for redistribution
condition to forming a limited partnership
Management WFOE’s registered capital must be fully contributed Management WOFE should be already profitable
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2009 Paul, Hastings, Janofsky & Walker LLP Confidential - not for redistribution
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invested by FIEs) 4 Formation of Limited Partnership (As Purely Domestic Partnership) 4 Management of Limited Partnership 4 Investments into Portfolio Companies
Government Sweetners for PE Funds
4 Limited Partnerships (Funds) established in
Shanghai Pudong entitled to various benefits until December 31, 2010.