I OVERVIEW OF RECENT ACTIVITY
Following a series of breakthrough regulations in 2012, the asset management industry in China2 has entered into the pan-asset management era. The industry continued to grow rapidly in 2013 and 2014, with all types of asset managers experiencing expansion of their respective asset management businesses. However, systemic risks were accumulating in the industry, particularly in ‘shadow banking’, an area believed to be one of the cumulative factors that led to the stock market crash in mid-2015. In addition, certain sectors of the industry such as insurance and internet finance, which were previously viewed as innovative engines of the industry, have exposed serious risks inherent in traditional finance practice and those generated or exacerbated by the new technology in 2015 and 2016. Relevant regulators have therefore gradually turned to more stringent risk control measures and prudent regulation of the asset management business. The reinforcement of regulation has continued since 2016, and further, institutional regulators are gradually in the process of consolidation under the supervision of the State Council. Meanwhile, the state policy to reinforce foreign exchange control, which started in late 2016, deferred the development of outbound investments, including asset management products’ investment in offshore financial markets in 2017.
II GENERAL INTRODUCTION TO the REGULATORY FRAMEWORK
As a branch of the financial industry, the asset management industry is heavily regulated by the ‘one bank and three commissions’ financial regulatory system, under which the People’s Bank of China (PBOC) is responsible for monetary policies and regulation of the macro-financial market, and the China Securities Regulatory Commission (CSRC), the China Banking Regulatory Commission (CBRC) and the China Insurance Regulatory Commission (CIRC) take charge of different financial institutions and their respective businesses. In spite of their independent regulation of different sectors, the trend of functional regulation in the asset management industry has become more apparent in recent years. For instance, the State Council emphasises financial stability in its oversight of financial industries and pursuant to the 5th National Conference of Financial Work in July 2017, a commission will be set up under the State Council to oversee financial stability and development, and the PBOC will have a strengthened role in the macro prudential management and guarding against systemic risks.
III COMMON ASSET MANAGEMENT STRUCTURES
Asset management products (AMPs) typically take the following legal forms:
a securities investment fund (SIF), which is commonly recognised as a special type of trust under Chinese law
b open-ended or closed-ended
c publicly offered
Privately placed investment funds (private funds)
a SIF or limited partnership
b open-ended and closed-ended
Private equity funds (of a narrow concept) and venture capital funds
a a majority in the form of limited partnerships
b some in the form of LLCs, trusts or other contractual arrangements
a SIF, limited partnerships, trusts or various asset management structures
b open-ended or closed-ended
Asset management schemes (AMSs) of securities companies, fund management companies (FMCs) or investment management subsidiaries of FMCs (IM subs), futures companies
a SIF or semi-trust contractual arrangements
b multiple client AMSs could be open-ended
b usually closed-ended
AMPs and private funds issued by insurance asset management companies (IAMCs)
a SIF, semi-trust contractual arrangements or limited partnership
Commercial bank products
a wealth-management contracts
b open-ended or closed-ended
c publicly offered or privately placed (i.e., private banking products)
a online lending (including peer-to-peer lending)
b equity crowd funding
c online insurance
d online trust
e online consumer finance
IV MAIN SOURCES OF INVESTMENT
- a public funds: 9.3 trillion yuan;
- b special AMSs of FMCs: 16.36 trillion yuan;
- c AMSs of securities companies: 18.77 trillion yuan;
- d AMSs of futures companies: 0.298 trillion yuan; and
- e private funds:5
• aggregate capital commitments: 11.9 trillion yuan; and
• aggregate capital contributions: 8.75 trillion yuan.
By June 2017, the numbers of qualified foreign institutional investors (QFIIs) and yuan QFIIS (RQFIIs) were 283 and 184 respectively, and the total quotas as approved by the State Administrations of Foreign Exchange were US$92.774 billion for QFIIs and 543.104 billion yuan for RQFIIs. The number of qualified domestic institutional investors (QDIIs) was 132 and the total quota for QDIIs was US$89.993 billion – the same figures as June 2016.6
V KEY TRENDS
Following A-share market crash and the slowdown of China’s economy since the summer of 2015, the relaxation of regulation and rapid growth in the asset management business have been replaced with stricter regulations, heightened risk prevention and immediate crisis management measures. Regulators continue to focus more on strengthening the regulation of the industry, including promulgating and implementing certain temporary ad hoc rules. The State Council has started the process of consolidation of regulatory powers that are currently imbedded in different institutional regulators.
i Industry developments
Commencement of regulatory consolidation of asset management industry
Functional regulation is a focus of State Council’s reform in the regulatory regime of financial industries including asset management. The State Council and other relevant central government departments are making regulations and ordinances that are expected to harmonise the regulation of different sectors of asset management. For instance, the State Council is drafting an ordinance on the regulation of all types of privately placed asset management products, which, once promulgated, is expected to unify the regulation of similar products by the CSRC, CBRC and CIRC. Further, a new commission is to be set up under the State Council to oversee the financial stability and development of the whole country, which is also viewed as a transition to uniform regulation of all sectors of the financial industry.
Emphasis of investor protection
Further to the ad hoc rules that addressed urgent but temporary needs in the regulatory regime in 2016, investor protection became the focus of all financial regulators in 2017. For instance, the CSRC released a new regulation on investor suitability, which is applicable to all securities and futures products whether publicly or privately placed. Each self-disciplinary organisation under the CSRC, such as the AMAC, the Securities Association and the Futures Association, issued its own guidelines on investor suitability, further to the CSRC regulation within its industry. The CIRC released the strictest rules to date prohibiting insurance companies from using premiums from universal life insurance policies in their private investments in listed companies.
Continued suspension of outbound investments
State policy imposed heightened regulation on foreign exchange conversions and outbound investments in 2015 and 2016, and this trend has continued in 2017. Therefore, no new quota has been approved for QDIIs since April 2015, and asset managers’ enthusiasm for products focusing on outbound investments has cooled down as a result of the rigid regulatory practice.
VI SECTORAL REGULATION
A Chinese insurance group and its member companies (including IAMCs, collectively ‘insurance companies’) participate in the asset management business typically as follows:
- a Insurance companies as investors. Insurance companies holding the relevant licences approved by CIRC may invest in various domestic and offshore AMPs. Primary CIRC regulations on insurance companies’ investment in AMPs include:
• the Interim Measures on the Administration of the Utilisation of Insurance Funds – these are the fundamental regulations on the use of insurance funds;7 and
• the Interim Measures on the Overseas Investment of Insurance Funds and the Detailed Implementation Rules – these regulations govern insurance companies’ outbound investments, including their investments in offshore mutual funds, private equity (PE) funds and real estate funds.
- b IAMCs as asset managers. IAMCs originated from the asset management branch within insurance companies, and before 2012 IAMCs primarily acted as managers for the insurance funds of their parents or other subsidiaries of their parents. Pursuant to the regulations released by CIRC and other regulators in 2012 and beyond, IAMCs have gradually come to be active asset managers as they may now:
• issue and sell AMSs;8
• raise and manage public funds;9
• form or acquire FMCs;10
• manage funding from other sources (such as pension funds and annuities);11 and
• raise private funds and form affiliated businesses specialising in private fund management.12
The regulatory regime continues to develop. For instance, the China Insurance Asset Management Association was established in September 2014 and takes charge of the registration and filing of IAMCs’ AMPs. Other developments include insurance companies’ investments in VC funds, CIRC’s case-by-case approval for insurance companies and IAMCs’ participation in PE funds as co-sponsors (such as New China Life’s co-sponsorship with a reputable PE firm of a Cayman fund targeting German industry 4.0-related investments in 2015). The trend of innovation in insurance products, however, has been replaced by heightened regulation in the years of 2016 and 2017, and hence, the CIRC as well as the insurance companies are more prudent in their investments and sponsorship of asset management products.
Pension funds in China consist of social security funds (SSFs), which are further divided into the National Social Security Fund (NSSF) and local SSFs, and annuity products.
The NSSF is a cornerstone investor to many AMPs, while local SSFs play a minimal part in asset management as their investments are limited to bank deposits and government bonds.
The regulators of NSSF are the Ministry of Finance (MOF) and the Ministry of Human Resources and Social Security (MOHRSS). The primary governing laws and regulations are the Social Security Insurance Law (2011) and the Interim Measures on the Administration of Investment by the NSSF (MOF and MOHRSS Circular  No. 12.) (Circular 12).
As authorised by the Social Security Insurance Law, NSSF Council takes charge of the management of NSSF.13 Pursuant to Circular 12 and other regulations, NSSF Council may:
- a decide to invest NSSF assets in bank deposits, government bonds and other similar instruments;
- b engage qualified asset managers to provide advisory services to it;14 and
- c invest in AMPs issued by the qualified asset managers.
For example, the NSSF has been the anchor investor in various PE funds ever since its investment in the China-Belgium Fund in 2004. The NSSF invested in 19 yuan funds, including funds sponsored by Hony Capital, IDG, CITIC Capital and CICC.15 Particularly, after nearly four years of suspension, NSSF restarted its investment in PE/VC funds in 2017.
The NSSF may invest in offshore AMPs, but other than offshore public funds, such investments are subject to approvals by the MOF and MOHRSS.16 Moreover, the NSSF Council is required by the NSSF Overseas Investment Provisions to engage overseas investment managers (typically, qualified offshore institutions that provide asset or wealth management) for NSSF’s overseas investments.
Annuity products are supplementary pension funds raised by enterprises, and an annuity product is usually a pool of money from employer’s contributions, co-payment of the employees and the proceeds generated by investments of the product assets.
The MOHRSS is the chief regulator of annuity products. Managers of annuity products are required to file the constitutional agreements of the products with the MOHRSS or its local counterparts.17
The MOHRSS released regulations relating to the administration of annuity products, including the amended Measures for Implementation of Enterprise Annuities (2015) (MOHRSS Ordinance 24), and the Pilot Measures for Implementation of Public Service Organization Annuities (2016) (MOHRSS Circular 92).
In contrast to SSFs, the permitted investments of annuity products are broad and include bank deposits, various government and commercial bonds, various insurance products,18 wealth management products, infrastructure debt investment schemes, AMSs and stock index futures.19
Since December 2013, annuity products have had favourable tax treatment,20 including a tax credit for each employee-investor on both the employer’s contributions allocable to the employee and the employee’s qualified co-payment.
iii Real property
In China, the concept of real estate (RE) funds is loosely defined and can be construed to include any AMP with an investment focus on the real property industry. There are no integrated laws or regulations on RE funds, and regulatory requirements and restrictions are sporadically seen in the regulations governing other AMPs. Currently, major types of real estate funds include private RE funds and AMSs investing in real property-related industries (RE AMSs).
Private RE funds may be broadly categorised as a type of PE funds and are typically sponsored by private fund managers. Like regular PE funds, they are typically established as limited partnerships, and subject to the same AMAC filing and reporting obligations.21
Unlike regular PE funds, they make a greater number of debt or hybrid investments into portfolio companies (usually real property development companies). Nonetheless, as a policy against overheat in the real estate industry, AMAC released strict rules on the filing of private funds that invest in real estate developments in early 2017, by which the filing of PE funds that focus their investment on residential real properties are suspended.
Unlike private RE funds for which private fund managers act as managers, RE AMSs take the form of AMSs issued by regulated asset managers (such as trust companies, IM subs and IAMCs). Private fund managers are usually the investment advisers to the managers of RE AMSs or sub-advisers to RE AMSs. That is, RE AMSs are typical channel products, and the regulated asset managers are typically only involved to fulfil minimum management and administration functions as required by the applicable regulations governing AMSs. New developments regarding RE AMSs are that the CSRC, CBRC and CIRC all have released more stringent rules dealing with RE AMSs whether they are channel products or actively-managed products. The PBOC set up a task force to facilitate studies on REITs in 2006, but no actual REITs have ever been established in China. As approved by relevant regulators on a case-by-case basis, some asset managers used AMSs (such as special AMSs of securities companies) to establish products that are in some ways similar to REITs.
iv Hedge funds
Before the amendment of the Securities Investment Fund Law ( the amended SIF Law), which became effective in June 2013, hedge funds in China primarily took the form of AMPs issued by regulated managers. Following the promulgation of the amended SIF Law, however, hedge funds are classified as a subgroup of private SIFs and can now be established in accordance with the amended SIF Law and its supporting regulations. Hedge funds in China may adopt the following forms:
Before the development of AMSs of regulated managers, hedge funds in China long took the form of trust schemes, among which the collective fund trust schemes were the most widely used. These trust schemes are collectively referred to as ‘sunshine trusts’ because they are issued by trust companies and are thus – as the investors may believe – to some extent endorsed by the CBRC. Sunshine trusts are required to file for records with CBRC and issue performance reports on a regular basis. The main governing regulations of sunshine trusts include the Measures for the Administration of Collective Fund Trust Schemes of Trust Companies and Guidelines on Securities Investment by Trust Companies, released by the CBRC in 2009.
AMSs of regulated managers (as alternatives to sunshine trusts)
Since 2012, AMSs of regulated managers (other than trust companies) have become alternatives to sunshine trusts. These include the collective AMSs of FMCs, IM subs and securities companies and AMSs of futures companies (collectively, CSRC-series AMS). The new regulations in 2016 and 2017 have made it more difficult for CSRC-series AMS to be used as channel products for hedge fund managers.22
Hedge funds can be established pursuant to the amended SIF Law.
Hedge funds raised under the amended SIF Law may be established as SIFs (without an entity form) or limited partnerships.23
Hedge funds raised under the amended SIF Law and their managers are subject to AMAC filing and registration requirements. One positive development in 2016 is that foreign asset managers are now permitted to set up wholly owned or majority-controlled subsidiaries in China and apply for registration of the subsidiaries with AMAC as private SIF managers, which typically includes hedge fund managers subject to the CSRC regulatory regime. Until now, two global asset managers have completed the registration of their PRC arms with AMAC as private fund managers, and more are in the process of application.
v Private equity
The concept of PE funds in China is generically used to include VC funds and private RE funds in addition to regular PE funds. Sometimes the concept is further stretched to include regulated asset managers’ AMPs that are focused on private equity investments.26 In this subsection, unless otherwise specified, ‘PE funds’ refers to the broad definition of PE funds, but does not include AMPs of regulated asset managers.
Most PE funds in China are established as limited partnerships pursuant to the Partnership Law. Some are established as LLCs pursuant to the Company Law, among which most are government-controlled PE platforms or seed funds.
Pursuant to the Circular on the Assignment of Supervisory Duties regarding Private Equity Fund Management issued by the State Commission Office for Public Sector Reform of China (SCOPSR) in June 2013, CSRC was given the regulatory responsibility over PE funds. In August 2014, CSRC released the Interim Measures for the Supervision and Administration of Privately-Raised Investment Funds,27 which set out the regulatory framework of CSRC over private funds (which include PE funds, private SIFs and other private funds) and private fund managers.
The AMAC is designated by CSRC as the self-regulatory association for private funds (including PE funds) and the asset managers managing private funds. PE funds and PE fund managers are subject to AMAC rules, including the AMAC Pilot Measures, which require PE fund managers to:
- a register with the AMAC once they are legally formed;28
- b file the records of PE funds they sponsor or manage with the AMAC;29
- c file required information of senior management and other investment professionals with the AMAC;30 and
- d provide regular reports and report material changes in relation to the funds to the AMAC.31
Since the first half of 2016, AMAC have released a series of rules that set forth requirements with respect to internal control, information disclosure and registration with AMAC of private fund managers, fundraising of private funds, and administration and registration of private fund service providers. More detailed rules, such as rules on custodian institutions and rules on private fund managers’ providing services of investment advisers, are being drafted.
Dual regulation of VC funds
The SCOPSR circular does not clarify whether ‘private equity funds’ include VC funds, which results in uncertainty in CSRC’s exclusive regulatory power of VC funds. In current practice, VC funds are required to follow both the filing regime of the National Development and Reform Commission (NDRC)32 and that of CSRC and the AMAC. In 2016 and 2017, there was a discussion about VC funds among the regulators, and some authorities such as NDRC promoted the idea of separating the regulation and regulators of PE funds and VC funds. In AMAC’s new asset management web system for registration and filing of asset managers and their private products, PE funds and VC funds are juxtaposed as two categories, and PE fund managers, when making the application for private fund manager registration, are required to choose only one of the two. It is likely that in the future, VC funds will be independent of PE funds in terms of regulation and preferential policy treatments.
Foreign investment in PE funds
Foreign investment in PE funds can be divided into foreign direct investment and investment through foreign-invested enterprises. With foreign direct investment, foreign sponsors and investors may commit to PE funds domiciled in China, and as such the funds will be treated as foreign investors in their portfolio investments. Therefore, their portfolio investments must comply with the Chinese foreign investment regulations. Such PE funds may take the form of foreign-invested holding companies,33 foreign-invested VC investment enterprises34 or qualified foreign limited partner (QFLP) funds (typically, foreign-invested limited partnerships35 with local QFLP pilot status36).
Foreign sponsors and investors may invest in PE funds through their subsidiaries domiciled in China. As such, the foreign ownership of these PE funds is indirect. Despite this, portfolio investments of such PE funds in practice are subject to foreign investment regulation to certain extents.
vi Other sectors
Owing to the long-standing regulation of the asset management business by different financial regulators in China, asset managers together with their products, notwithstanding similar structures and functions, are regulated by different authorities, and therefore subject to different regulatory requirements. Set forth below is an overview of additional AMPs in China, primarily classified by their structures and functions.
Private funds of regulated asset managers
Besides the private products described in the preceding subsections, certain other privately placed AMPs can be ‘private funds’ (of a broad concept), and they include various trust schemes of trust companies, AMSs of FMCs and IM subs, AMSs of securities companies, various products of IAMCs and certain privately placed wealth management products of commercial banks.37 All these products – if their managers are financial institutions subject to the CSRC’s regulation, such as securities companies, FMCs and futures companies and their respective subsidiaries – are governed by AMAC and required to make filing on the AMAC’s uniform asset management web system similar to other private funds.
Although governed by different regulations, these private funds (with a few exceptions),38 typically adopt similar structures. These include:
- a being organised as private SIFs39 or trusts;
- b not being established as entities, but rather being formed based on constitutional documents (such as trust agreements or asset management contracts);
- c adopting a co-trustee structure, namely:
• an asset manager, which is under the supervision of one of the financial regulators, issues and manages the product; and
• a custodian, who is typically a party to the constitutional document of the product, provides custody for product assets; and
- d being sold to no more than 200 qualified investors40 by private placement.
Similar types of supervision
The products are subject to similar types of supervisions from different regulators in that the asset managers should undergo certain filing, reporting or approval processes with their respective financial regulators for the formation of the products; and the asset managers and custodians are subject to ongoing reporting and disclosure obligations to their relevant financial regulators (or self-regulatory associations designated by the financial regulators) during the term of the products.
As an essential part of shadow banking in China, private funds are frequently seen as channelling investments for other AMPs, particularly commercial banks’ wealth management products. To address the inherent risks associated with channel products, each financial regulator has issued rules to enhance the risk management and internal controls of asset managers and AMPs within its jurisdiction. Certain new regulations were released in 2016 and 2017 by different regulators, which have made it more difficult for regulated institutions to carry out channel products business.
Unifying requirements of investor suitability
In 2014, CSRC published its criteria of ‘qualified investors’ for private funds in Circular 105. Under Circular 105, an individual or institutional investor is a qualified investor if:
- a it is capable of identifying and absorbing the risks of the proposed investment;
- b its investment in a single private fund is no less than 1 million yuan; and
- c as an institution, its net asset value is no less than 10 million yuan, or as an individual, the investor owns financial assets of not less than 3 million yuan or that investor’s average annual income is not less than 500,000 yuan for the past three years.
Further to the investor suitability requirements of all securities and futures products under its regulation, including public funds and private funds, CSRC published its Investor Suitability Measures in 2016, which came into force in July 2017. Pursuant to the measures, investors are classified into ordinary investors and professional investors on the basis of their assets, investment knowledge, experience and risk tolerance, and all fund managers and fund service providers are required to fulfil their investor suitability obligations and to provide special protection to ordinary investors during the entire term of the funds.
The QDII programme is the collective name given to assorted quota-based mechanisms that permit qualified Chinese financial institutions (i.e., QDIIs) to invest in offshore financial markets. The major types of QDII products include:
- a CSRC products:41 namely, public funds, AMSs of FMC QDIIs and AMSs of securities companies’ QDIIs;
- b CBRC products: namely, wealth management products of commercial banks’ QDIIs42 and trust schemes of trust companies QDIIs;43 and
- c other products, including qualified insurance companies’ overseas investments.44
QDLP and QDIE
Shanghai started the pilot QDLP programme in 2012, enabling qualified offshore hedge fund managers to form feeder funds in Shanghai and raise capital from qualified Chinese investors via private placement,45 subject to a foreign-exchange quota allocated to the manager simultaneously with approval of its QDLP status. Under the Shanghai QDLP Rules, a joint panel led by the SFO selected the first batch of six QDLP fund managers in September 2013 and the second batch of five managers in July 2015. In September 2015, a third batch that included a Sino-foreign joint venture and an FMC was approved, which reflects the further diversification of QDLP fund managers. In 2016 and 2017, despite the non-publication of the amended QDLP rules, the investment scope has been extended to include offshore PE funds and the requirements for QDLP manager formation has been relaxed.
In August and December 2014, Tianjin and Shenzhen each released their upgraded versions of QDLP programme, known as QDIE. The QDIE programme enables qualified onshore and offshore managers to raise capital from Chinese investors and make investments in offshore funds (including funds targeting the secondary market, PE and real estate) and investments directly in offshore portfolio companies and real property. Despite the relaxation in written rules and regulatory practice of local authorities with respect to QDLP and QDIE, no new foreign exchange quota has been approved by state-level authorities to these local pilot programmes since April 2015, which is consistent with the current policy with a view to reducing the pace of outflux of capital.
One subsector of AMPs of regulated managers concerns securitisation products. Under the current regulatory regime, these may take the form of trust schemes,46 special AMSs of securities companies,47 project asset support schemes of IAMCs48 or asset-backed notes.49 In late 2014, regulators of different securitisation products all began to minimise their regulation, and most products are now only subject to filing requirements rather than approvals. In 2016 and 2017, securitisation has been used for public and private partnerships (PPP) and has become a popular form that PPP sponsors (typically local governments and local SOEs) would consider.
Public products are sold to retail investors by public offering. They include (1) public funds,50 (2) comprehensive wealth management products of commercial banks and (3) investment-linked policies of insurance companies. The CBRC and CIRC are imposing heightened regulation on products (2) and (3) in 2017, and accordingly, commercial banks and insurance companies have become more prudent in issuing innovative products in these areas.
The regulation of internet finance and online asset management is being strengthened as the rapid growth in previous years has resulted in accumulation of systematic risks in the industry. The State Council ushers in a special regulation of internet finance, and various provincial and municipal governments have adopted ad hoc measures with respect to internet finance, which include AIC’s suspension of formation registration of new investment-typed enterprises. The National Internet Finance Association of China, which was formed in Shanghai in March 2015, is designated as the industrial self-regulator of the internet financial industry.
VII TAX LAW
i Taxation (income tax)
AMPs and industry participants are subject to different taxes in China, which include income tax, VAT and deed tax. Income tax is a key consideration when structuring AMPs.
Income tax of AMPs51
AMPs established by way of contractual arrangements (including trusts and SIFs) and those established as limited partnerships are income tax pass-through vehicles under the current tax law. Limited partnership AMPs, however, may have an obligation to withhold their partners’ individual income taxes (IIT). AMPs established as LLCs are subject to enterprise income tax (EIT), which is set at 25 per cent of taxable income. However, certain tax benefits may be granted to qualifying corporate VC funds and partners of limited partnership VC funds.
Income tax of asset managers52
Chinese asset managers are typically established as corporations (including LLCs and joint stock companies) or limited partnerships. A corporate asset manager is subject to EIT, while a limited partnership is an income tax pass-through vehicle and its partners are responsible for their respective income taxes. A limited partnership asset manager is usually obligated to withhold the IIT of its individual partners.53
Income tax of foreign investors
Depending on its investment structure, a foreign institutional investor (that is not otherwise recognised as a ‘resident taxpayer’ under the Enterprise Income Tax Law) will be:
- a subject to regular EIT on its capital gains generated from the AMP, but exempted from EIT on any dividends or interests from the AMP, if the investment structure constitutes an ‘agency or office’ (i.e., permanent establishment in the terms of Chinese tax regulation);54 or
- b subject to withholding income tax (currently at a rate of 10 per cent or a reduced rate as provided under relevant tax treaties) on its taxable income (including capital gains, dividends and interests) generated from the AMP, if its investment structure does not constitute a permanent establishment.55
For QFIIs, a circular released by the State Administration of Taxation (SAT) in 200956 provides that dividends and interests that QFIIs receive from AMPs are subject to withholding income tax. That is, QFIIs’ investments in AMPs are not regarded as permanent establishments in terms of taxation on the dividends and interests QFIIs receive from AMPs. A 2014 circular57 clarifies that QFIIs and RQFIIs are temporarily exempted from income taxation on their capital gains generated from stock transfer from 17 November 2014.58 Moreover, an SAT publication in July 2015 further clarifies that capital gains from A-share transfers via the Shanghai-Hong Kong stock connect programme and income from SIFs’ distributions are temporarily exempted from income taxation, and a new notice of SAT released in December 2015 clarifies the IIT on income generated in connection with Mainland-Hong Kong Mutual Recognition of public securities investment funds (i.e., mutual funds).
A foreign individual investor is subject to IIT:59
- a on the income gained both within and outside of China, if the investor has a domicile in China or has resided in China for one year or longer; or
- b on the income gained within China alone, if the investor has no domicile in China and has not resided in China for one year or longer.
Favourable tax treatment pursuant to bilateral tax treaties
By the end of November 2016, China had entered into tax treaties or other bilateral tax arrangements for avoidance of double taxation with 102 countries and tax jurisdictions, of which 98 have come into force.60
In April 2014, SAT released a circular61 and clarified that, if qualified as ‘beneficial owners’ under the circular, investors of the countries and tax jurisdictions that have entered into tax treaties with China may enjoy the preferential tax treatment set forth in the treaties, notwithstanding that their investments in China were made through ‘entrusted investments’, meaning investments through products of third-person overseas professional institutions. The circular explicitly provides that the overseas professional institutions include offshore REITs, QFIIs, RQFIIs and ETFs, but does not clarify whether other AMP managers (such as PE managers) that are not orthodox licensed financial institutions could also be treated as overseas professional institutions.
ii Tax report (Common Reporting Standard)
In addition to routine tax filing and withholding obligations, PRC asset managers are subject to due diligence and reporting requirements with respect to foreign clients’ accounts. In June 2014, China reached an ‘in substance’ Type 1 inter-governmental agreement under the Foreign Account Tax Compliance Act (FATCA) with the United States on cooperation with respect to FATCA. China entered into the Organisation for Economic Co-operation and Development’s Common Reporting Standard (CRS) system in 2015, and in May 2017, the SAT, MOF and the PBOC, and the CSRC, CBRC and CIRC jointly released the Measures on Due Diligence Procedures for Non-residents’ Financial Account Information in Tax Matters. The Measures earmark the implementation of CRS in China and, as of 1 July 2017, require financial institutions, including most of the asset managers in China, to carry out due diligence on pre-existing and new financial accounts and identify the accounts of non-residents.
Compared with developed markets, the asset management industry in China is relatively new in the financial space. Yet, the intense focus on and development of the industry in the past few years have been accompanied by undesirable side effects such as heightened risks and more frequent occurrence of crises in certain sub-sectors. The underdevelopment of functional regulation and the labyrinth of capricious and often uncoordinated legislation and regulation initiated by different regulators in response to the short-term fluctuations of the market have aggravated the situation and resulted in more turmoil in the industry overall. In addition to the ad hoc rule-making by different institutional regulators in 2015 and 2016, this year so far has seen more consistency in institutional regulators’ rule-making and regulatory practice. Moreover, the State Council and other central government authorities are implementing actions to oversee the asset management industry as a whole. Hopefully, the legislative and regulatory synergy will lead to promotion of a more transparent and efficient market, and enhanced protection of the investors.
1 Richard Guo, Zhen Chen and Zhiyi Ren are partners at Fangda Partners.
2 Throughout this chapter, ‘China’ refers to mainland China only.
6 These figures are provided on the website of the State Administrations of Foreign Exchange (SAFE), available at www.safe.gov.cn.
7 Under Section 3 of the Interim Measures, ‘insurance funds’ include paid-in capital, capital reserves, accumulated profits, insurance reserves, and other funds of insurance companies or insurance group (holding) companies.
8 The Notice on Relevant Issues in IMACs’ Pilot Business of Asset Management Products (CIRC Circular  No. 124).
9 The Interim Measures on Asset Management Institutions’ Carrying Out Public Fund Management Business (CSRC Circular  No. 10).
10 The Pilot Measures on Insurance Institutions’ Formation of FMC (CIRC Circular  No. 27).
11 The Notice on Several Matters with respect to IMAC (CIRC Circular  No. 90).
12 The Notice on Several Matters with respect to Formation of Private Funds (CIRC Circular (2015) No. 89).
13 Article 71 of the SSI Law.
14 By April 2015, there were 18 qualified institutions that have been engaged by the NSSF Council, 16 of which were FMCs, available at www.ssf.gov.cn.
15 A private equity fund list is available at www.ssf.gov.cn/tzyy/201309/t20130928_5911.html.
16 Section 15 of the Interim Provisions of Administration of Overseas Investment by NSSF (NSSF Overseas Investment Provisions) (MOF, MOHRSS and PBOC Circular  No. 24).
17 Section 4 of the MOHRSS Ordinance 24.
18 Id., Section 47.
19 The Notice on Expansion of Investment Scope of Enterprise Annuity Funds (MOHRSS, CBRC, CSRC and CIRC Circular  No. 23). The permitted investment scope of public service organisations’ annuities is not as large as enterprise annuities, e.g., the public service organisations’ annuities cannot invest in investment-link insurance products or universal insurance products. See Section 25 of MOHRSS Circular No. 92.
20 The Notice on Relevant Issues regarding Individual Income Tax of Enterprise Annuities and Occupational Annuities (MOF Circular  No. 103).
21 The Measures on the Registration of Private Fund Managers and Filings of Private Investment Funds (Pilot) (AMAC Circular  No. 1) (AMAC Pilot Measures) is the primary self-regulatory rule.
22 For instance, the Interim Measures of Management of Private Asset Management Business of Securities and Futures Institutions (CSRC Circular (2016) No. 13) sets forth the maximum leverage ratio of AMS and the conditions of investment advisers to AMS. The Measures for the Suitability Management of Securities and Futures Investors (CSRC Decree No. 130) (the Investor Suitability Measures) imposes the obligation of investor suitability on the fund managers.
23 In accordance with Article 153 of the amended SIF Law, the securities investment activities of SIFs that take the form of limited partnerships or LLCs are subject to the amended SIF Law requirements.
24 The Ordinance on Administration of Futures Trading (State Council Ordinance No. 62) and CSRC supporting rules.
25 See Section 5 of the Ordinance on the Supervision and Administration of Securities Companies (State Council Ordinance No. 522).
26 For instance, private equity investment trust schemes are sometimes recognised as PE funds in form of trusts. In addition, special AMSs of IM subs are permitted to make alternative investments of which private equity is a type. See the Pilot Measures for the Asset Management Services of FMCs for Specific Clients (CSRC Circular  No. 83) for more detailed information.
27 CSRC Ordinance No. 105, which was promulgated in August 2014.
28 Section 5 of the AMAC Pilot Measures.
29 Id., Section 11, No. 32.
30 Id., Section 15, No. 32.
31 Id., Sections 20–23, No. 32.
32 The primary regulations are the Interim Measures on Administration of Venture Capital Funds (the joint circular of the NDRC, Ministry of Science and Technology (MoST), MOF, PBOC, STASAT, CSRC, CBRC and SAFE  No. 5).
33 The fundamental rules for foreign investment holding companies are set out in the Provisions on the Establishment of Investment Companies by Foreign Investors (MOFCOM Circular  No. 22, amended and supplemented by MOFCOM Circular  No. 3).
34 The fundamental regulation on foreign-invested venture capital investment enterprises is the Provisions on Administration of Foreign-Invested Venture Capital Investment Enterprises (MOFCOM, MOST, SAIC, SAT and SAFE Circular  No. 2).
35 The fundamental regulation on foreign-invested limited partnerships is the Provisions on Administration of Registration of Foreign-invested Partnerships (SAIC No. 47), promulgated in 2010.
36 Shanghai released the very first pilot QFLP programme in 2010. Beijing, Tianjin, Chongqing and Shenzhen Qianhai issued their versions of QFLP programmes between 2011 and 2013.
37 For a more complete list of these products, see Sections II and III, supra.
38 For example, single client AMSs of securities companies and wealth management products of commercial banks are usually not treated as SIFs or trusts.
39 Because the Trust Law has precedence over the amended SIF Law, the SIF is generally viewed as a special type of trust.
40 Different regulations that apply to private funds have different requirements in relation to ‘qualified investors’, and this in turn allows managers and investors to take advantage of regulatory arbitrage.
41 The primary governing regulations are the Interim Measures on Administration of Offshore Securities Investment of Qualified Domestic Institutional Investor (CSRC Circular  No.46) and its implementation rules.
42 The primary governing regulations are the Interim Measures on Administration of Overseas Wealth Management of Commercial Banks on Behalf of Clients (CBRC Circular  No.121) and its implementation rules.
43 The primary governing regulations are the Interim Measures on the Overseas Investment of Insurance Funds and its Detailed Implementation Rules. See Section VI.i, supra.
44 The primary governing regulation is the Interim Measures on the Overseas Investment of Insurance Funds and its Detailed Implementation Rules. See Section VI.i, supra.
45 Major regulations are the Notice of Opinions on Carrying out the Pilot Programme of Qualified Domestic Limited Partners (Shanghai Municipal Government Circular  No. 33) and the Implementation Measures on Carrying out the Pilot Programme of Qualified Domestic Limited Partners ((SFO) Circular  No. 101) (collectively the ‘Shanghai QDLP Rules’).
46 For credit securitisation, the primary governing regulations include the Pilot Administrative Measures on Credit Assets Securitisation (CBRC Circular  No. 7), the Pilot Supervision and Administration Measures on Credit Assets Securitisation by Financial Institutions (CBRC Circular  No.3), and the Notice on Relevant Matters regarding Further Expanding the Pilot Programme of Credit Assets Securitisation (PBOC Circular  No.127).
47 For enterprise asset securitisation, the primary governing regulations are the Administrative Provisions on the Asset Securitisation Business of Securities Companies and the Subsidiaries of Fund Management Companies (CSRC Circular  Circular 49).
48 This product was viewed as quasi-securitisation in the market when first introduced into the market by CIRC in 2014.
49 The primary governing regulations are the Guidelines of Asset-Backed Notes Issued by Non-financial Institutions on the Inter-bank Bond Market (NAFMII Circular  No. 14), which lifts the approval requirements for IAMAC to issue such schemes.
50 The primary governing laws and regulations are the amended SIF Law, the Measures on Administration of the Operation of Publicly Offered SIFs (CSRC  No. 104) and supporting regulations.
51 The primary governing laws include the Enterprise Income Tax Law (2007), the Implementation Ordinance for the Enterprise Income Tax Law (State Council Ordinance No. 512) (EIT Ordinance) and the supporting regulations promulgated by the State Administration of Taxation.
53 In addition to income tax, asset managers are subject to value-added tax (VAT) for their fee income such as management fees and advisory fees. Since March 2016, China has adopted general policy and relevant regulations that gradually impose VAT on most of the service industries that were originally subject to business taxes.
54 Article 3, 4 and 26 of the Enterprise Income Tax Law.
55 Article 3, 4 and 27 of the Enterprise Income Tax Law, and Section 91 of the EIT Ordinance.
56 The Notice on the resident enterprises’ obligations of withholding tax on dividends and interests to QFIIs (SAT Circular  No. 47).
57 Notice on Temporarily Waiving Enterprise Income Tax on the Incomes Obtained by QFIIs and RQFIIs from Transferring Stocks and other Equity Investment Assets within China (Cai Shui  No. 79).
58 The above Notice emphasises that QFII and RQFII income generated before that date are subject to income taxation, and SATs and their local counterparts are pursuing tax payments and overdue fines pursuant to the Notice.
59 The Individual Income Tax Law (2011).
60 This figure is provided on the website of SAT: www.chinatax.gov.cn.
61 The Announcement of Administration of Taxation on the Identification of Beneficial Owners under Entrusted Investment (SAT Annc.  No. 24).