Shanghai RMB QFLP program still missing key steps
Latest reports indicating that China's State Administration of Foreign Exchange (SAFE) has approved a $3 billion quota for the Shanghai municipal government to allow foreign currencies to be converted into RMB for investing into local private equity funds still leave the Qualified Foreign Limited Partner (QFLP) scheme short of some key steps before it is likely to attract foreign capital, according to AVCJ sources.
The original Reuters report indicated that SAFE has approved the quota to allow established global LPs to invest in Shanghai-incorporated RMB-denominated private equity funds, with the Shanghai government likely to grant $300 million entitlements to three foreign institutions. However, the latest developments carry no further details on the taxation structure surrounding such investments, nor on the status of funds invested under the scheme when seeking to invest into companies in China's list of restricted sectors for FDI.
According to AVCJ sources, funds set up under the new rules will have few attractions for foreign LPs unless they carry a 5-10% withholding tax structure with safe harbor provisions, rather than the 25% enterprise income tax level currently paid by domestic LP investors in RMB funds. However, the reported rules on eligible LPs for the scheme appear to be fairly lax, requiring just $1 billion of assets or $500 million of capital, and only two years' appropriate investment experience.
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