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Asset & Wealth Management Seminar

Private Securities Investment

Fund Management Business in
China

31 August 2016

Oliver Kang
Lead Tax Partner , North China
Financial Services Tax Practice
PwC Beijing
+86 (10) 6533 3012
+86 186 1849 8190
oliver.j.kang@cn.pwc.com
PwC
Oliver is a tax partner leading PwCs North China Financial Services Tax
Practice in Beijing.
Oliver has 16 years of experience in the management industry. He has
advised a number of PE/VC and hedge fund clients on their
onshore/offshore fund structuring and carried interest planning. He has
also advised a number of local mutual fund management companies on
their QDII/ETF products and offshore fund structures managed by Hong
Kong subsidiaries. Oliver has also assisted foreign managers in acquiring
Chinese non-performing loans and assisted Chinese securities houses in
issuing domestic REITs-like products.
Oliver is a regular speaker at tax seminars and forums. He contributes
ideas to government officials and industry associations on tax policies,
financial products innovation relating to the asset management industry.
Oliver is a member of China Institute of Certified Public Accountants (CICPA).
2

Frank Shan
Financial Services Practice
Partner
PricewaterhouseCoopers
Zhong Tian CPAs LLP
Deputy Chief Accountant
+86 (21) 2323 3487
+86 137 6166 6081
frank.shan@cn.pwc.com
PwC
Frank is the deputy chief accountant of PwC and an Assurance Partner.
Frank has been with PwC Shanghai and US Boston for 17 years and mainly
serves financial services clients, accumulating experience in the asset
management industry for more than 15 years.
Franks major clients include more than 70 QFII /RQFII/QFLP/QDLP
portfolios; around 10 WOFEs/representative offices of foreign asset
managers, more than 30 fund management companies and securities
investment funds under management; more than 20 PE/VC fund groups,
hedge fund groups, and insurance asset managers. He provides services
ranging from statutory audit, special purpose audit, capital verification
and internal control policy and procedure review, ISAE 3402 audit as well
as GIPS verification. He has extensive experience in the areas of financial
accounting and reporting as well as internal control for various players in
Chinas financial service industry, especially in asset management industry.
During his time with PwC US Boston office from 2006 to 2007, Frank
specialised in the provision of various services to regulated investment
funds, which included financial statements purpose audit and regulatory
purpose audit. He was also involved in SAS70 audits for the bank custody
services and investment management industries.
Frank graduated from Shanghai Jiao Tong University. He is qualified as a
Certified Public Accountant of China and is a CFA charter holder. He is an
active membership in the CFA China Society.
3
Content

1 Highlights of the new rule

2 Roadmap of Chinas asset management sector opening up

3 A glance at Chinas private securities fund industry

4 Practical issues for foreign managers

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Highlights of the new rule

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Background

In the 8th Round of the China-US Strategic and Economic Dialogue, China expressed
that it welcomes qualified WFOE or JV to apply for private securities fund management
On 30 June 2016, the CSRC speaker confirmed that WFOE or JV managers can
register with the Asset Management Association of China (AMAC) and carry on private
securities fund management activities following this
AMAC issued its 10th FAQ Regarding Registration and Recording-filing of Private
Funds on the same day, clarifying the detailed requirements for the registration of
private securities fund managers where they are foreign invested WFOE or JV
managers

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Key principles to follow

The onshore manager must be in form of a corporation, i.e. a

Legal form
WFOE or JV

Fundraising should be conducted in a non-public method and

Fund-raising
from qualified domestic investors

Investing in domestic capital market

Business No cross-border funds should be involved
scope

Making investment decisions independently from China

Trading instructions are not allowed to be issued from an overseas
Operation entity or via an overseas trading system

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Who can register with AMAC?

Incorporated in China
The foreign shareholder is a financial institution licensed in the jurisdiction that has
signed a MOU with the CSRC
Not subject to severe sanctions
Where managers have de facto foreign controlling persons, such persons should meet
the above 3 conditions

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How to register with AMAC

Submission of the following information/documents

Basic information including: business license, AOA, major shareholders, senior
executives and other personnel, various internal control policies
Letter of Commitment certifying the truth, accuracy and completeness of above submission
A legal opinion issued by a Chinese law firm
Launch a fund within 6 months or be de-registered
Regular reporting and disclosure requirements
Fund, monthly reporting, AUM, unit value, number of investors
Manager, annual reporting and annual audit
Ongoing ad hoc updates

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Roadmap of Chinas asset
management sector opening up

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Timeline

2004: Qualified Domestic 2013: Qualified Domestic Limited

Institutional Investors Partner (QDLP) scheme
(QDII) scheme Allowed Extension of QDII; allow Chinese
Chinese investors to invest investors to invest in offshore hedge
in offshore markets funds via an onshore feeder fund

2002: Qualified Foreign 2010: Qualified Foreign 2016: WFOE or JV fund

Institutional Investors Limited Partner (QFLP) managers can raise onshore
(QFII) scheme Allowed scheme Extension of QFII private securities funds
foreign investors to invest to foreign LPs investing in
in Chinese markets private equity fund in China

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QFII

Foreign
investors

Foreign Fund
Offshore Manager
Fund

Outside PRC Investment

PRC return

Domestic
assets

Offshore fund should avoid having a permanent establishment in China

Tax on capital gains derived before 11 November 2014
Practical issues with repatriation of profits

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QDII

Domestic
investors

China Fund
Onshore Manager
Fund

PRC Investment
Outside PRC return

Overseas
assets

Onshore fund should avoid having PE in other jurisdictions

Main concern is the overseas withholding tax issue
Can onshore funds access Chinas tax treaty network?

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QFLP

Foreign LP
Outside PRC Foreign or
PRC Domestic GP
Domestic LP

Fund RMB
manager fund

Domestic
assets

Whether foreign GP/LP will be regarded as having a permanent establishment in China

How would carried interest be taxed and how can profits be repatriated

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QDLP

Domestic Domestic
limited partners general partner

RMB
fund
PRC
Outside PRC
Foreign general
partner
Offshore fund
manager Master
fund

Foreign
assets

How to structure the onshore and offshore fee proportion

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New rule under FAQ No. 10

Foreign financial
institution

Outside PRC Dividends

PRC
Investors >50%

Investment
return
Trustee and management agreement
Fund JV or WFOE

Management and incentive fees

Domestic
assets

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In the futurea fully open market?

Overseas Foreign Investor

assets

Outside PRC Foreign or

PRC Domestic Manager

ONE Domestic
fund Investor

Domestic
assets

Both domestic and overseas investors can invest into ONE fund that is managed by
either domestic or foreign managers making investment into various classes of assets
in global markets

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A glance at Chinas private securities
fund industry

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Overview of Chinas private funds market

Different types of private funds in China

43,535 July 2016

40,000

30,000

23,711
21,948

20,000

11,763
10,000 7,609 7,238
4,187
3,272
1,160 1,839 1,279
460
-
Private
PrivateSecuties
Securities Private Equity Venture Capital Others

The Number of Fund Managers The Number of Funds AUM(100 Million)

Source: Asset Management Association of China (http://www.amac.org.cn/)

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Overview of Chinas private securities funds market

25,000 23,711
22,911

19,605 21,948
20,000
17,892
16,756 19,447

15,000 16,813
13,078
14,553

9,723 11,963
10,000 8,506 10,965 11,332 10,747
8,970 8,981
5,544 7,609
4,383
5,000 5,851

3,535
2,527
-
01/01/2015 01/04/2015 01/07/2015 01/10/2015 01/01/2016 01/04/2016 01/07/2016

The Number of Fund Managers The Number of Funds AUM(100 Million)

Source: Asset Management Association of China (http://www.amac.org.cn/)

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Overview of Chinas private securities funds market

The number of managers for each kind of private securities funds July 2016

5,778

5,000

4,000

3,000

2,000

1,000
1,000
458 572
39 35 76 62 110 76
-
>=5 Billion 2~5 Billion 1~2 Billion 0.1~1 Billion <0.1 Billion

Fund Manager Investment Adviser

Source: Asset Management Association of China (http://www.amac.org.cn/)

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Private securities fund management business
Different market players

Investor

Investment
Adviser

Fund Manager

Outsourcer Custodian

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Private securities fund management business
Organisation chart example

Board of
Shareholders

Board of Directors/
Executive Director
Risk Control
Committee
General Manager
Deputy Investment
General Manager Decision Committee

Integrated IT Investment Research Marketing Operation Risk

Management & Sales Management Control

Admin. Finance HR Dealing Product Market

Development Promotion

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Private securities fund management business
Relevant regulations
Jan 17, 2014 The Trial Method for Private Investment Fund Managers Registration and Funds Filing
Jun 26, 2014 The Trial Guidance Regarding Risk Management of Fund Management Companies
Aug 22, 2014 The Interim Measures on Supervision and Management of Private Investment Funds
Oct 16, 2014 The Trial Guidance for Fund Raising and Transfer of Private Investment Funds
Nov 24, 2014 The Trial Guidance for Fund Outsourcing Services
Dec 15, 2014 The Self-discipline Principles for Professional Conduct of Fund Personnel
Feb 1, 2016 The Trial Guidance Regarding Internal Control of Private Investment Fund Managers
Feb 4, 2016 The Administrative Measures for Private Investment Funds Information Disclosure
Feb 5, 2016 The Guidance for Legal Opinion of Private Investment Fund Managers Registration
Apr 15, 2016 The Administrative Measures for Private Investment Funds Raising
Apr 18, 2016 The Guidance for Fund Contract of Private Investment Funds
Jul 14, 2016 The Provisional Regulations Concerning Private Asset Management Business of
Securities and Futures Institution

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The Provisional Regulations Concerning Private Asset
Management Business of Securities and Futures
Institution

The Impact of the new rule:

Special products
a. Guaranteed fund
b. Structured fund
c. Cash-pooling fund
Investment adviser
Bonus motivation mechanism

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Private fund managers involvement
in mutual fund business

Transformation into mutual fund manager

Possibility

Private fund managers involvement Setting up mutual fund company

Acquisition of mutual fund company

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Practical issues for foreign managers

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Issue No. 1 Name registration

Conflict between AMACs requirement and the practice of Administration for Industry
and Commerce (AIC) regarding company name registration
In many locations, AIC does not allow foreign-owned private securities fund managers
to include the words fund management, investment management, asset
management in their names but AMAC requires them to do so
Local governments such as Shanghai and Tianjin are currently looking into this matter

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Issue No. 2 Potential Challenges in Fund Raising

Limited track record in China domestic market QFII, Shanghai HK stock connect, CIBM
Competitions from local fund mangers
Lack of institutional investors
Access to High Net Worth Individuals largely controlled by channels like private
banking and other placement agents

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Issue No. 3 Operating model

JVs/WFOEs are required to make independent decisions for funds (i.e. they cannot be
merely placing trading orders on behalf of foreign institutions)


JVs/WFOEs are only allowed to appoint a qualifying investment advisor (one who is
registered with AMAC for at least a year, among other conditions)
Functions that are clearly can be outsourced: distribution of fund units, payment
agent, unit registration, valuation, IT support
Question: what functions have to be done in house?

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Issue No. 3 Operating model (continued)

Foreign financial
Model # 1?
institution

Outside PRC Dividends

PRC
Investors

Investment
return
Trustee and management agreement
Fund JV or WFOE

Management and incentive fees

Domestic
assets

The JV/WFOE has all core functions in house

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Issue No. 3 Operating model (continued)

Foreign financial
Model # 2?
institution
Dividends/
consulting
Outside PRC Investment fees
PRC consulting
Investors agreement

Investment
return
Trustee and management agreement
Fund JV or WFOE

Management and incentive fees

Domestic
assets

Can the foreign financial institution become a qualifying investment advisor?

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Issue No. 3 Operating model (continued)

Foreign financial
Model # 3?
institution
Dividends
Outside PRC Licensing /Royalty
PRC agreement
Investors

Investment
return
Trustee and management agreement
Fund JV or WFOE

Management and incentive fees

Domestic
assets

Foreign investor licenses certain technology, e.g. algorithm, to the JV/WFOE

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Issue No. 4 Taxation of private securities
investment funds
Currently, there is no specific guidance on the taxation of such funds
In practice, guidance is taken from the taxation basis of securities investment funds:
- Caishui [2008] No. 1 Gains from trading of Chinese shares and bonds, dividends
from Chinese shares, interest from Chinese bonds and other income derived by a
domestic securities investment fund are temporarily exempt from corporate income tax.
- Caishui [1998] 55 & [2002] No. 128 Listed companies and issuers of bonds
should withhold 20% individual income tax from payment of dividends or interest
to a domestic securities investment fund.
- Caishui [2016] 36, securities investment funds are exempted from VAT for transfer
of shares and bonds.

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Issue No. 5 Taxation of incentive fee

Investors

Investment
return

Trustee and management agreement

Fund JV or WFOE

Management and incentive fees

There are different methodologies of calculating incentive fees commonly used in the market
Incentive fees are usually calculated either based on the funds high water mark or
each investors high water mark. The timing of calculation (e.g. at regular intervals or
at redemption) and form of incentive (e.g. cash or units) varies

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Issue No. 5 Taxation of incentive fee (continued)

Some tax issues to consider from income tax and VAT perspectives:
Nature of incentive Service fee? Investment income?
Timing of taxation
Adjustments made to incentive fee payable by investors who subscribe when net asset
value is above or below the high water mark

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Issue No. 6 Transfer pricing

Typical valuation chain of a hedge fund manager

Product Ongoing
Research Fund Raising Execution
Design modification

What would be performed from onshore?

How much should be retained onshore?
How to repatriate the extra profit?

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Issue No. 6 Inter-company charges subject to
challenging
In response to the United Nation's request for comments on intra-group services and
management fees, China's SAT submitted its views to be included in the next update of
the United Nations Practical Manual on Transfer Pricing

Four issues to be considered SAT Tests

1. Benefit test 2. Are the 3. Have the 4. The definition Benefit Test Need Test
from the services services of shareholder
perspectives necessarily already been services in the
of both service needed by the remunerated OECD TP
provider and subsidiary in through the TP Guidelines is Duplication Value
recipient China? policies of too narrow Test Creation Test
other related
party
transactions
Remuneration Authenticity
Test Test

e.g Strategic High-end Duplicative Duplicative

. management advisory and remuneration shareholder
legal services to overseas activities
related parties

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Q&A

PwC
Thank you!

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