It is difficult to list the differences between contract funds and limited partnership/company funds in the main body of fund operation and internal governance structure. This paper summarizes these differences and summarizes the characteristics of contractual funds as follows:
1. Contract funds have advantages in operating costs and time costs.
Investors of contractual funds set up investment funds by signing fund contracts drawn up by fund managers. The so-called investment fund is only the agent of the legal relationship of collective self-interest trust based on contract, and does not have independent legal subject qualification. Therefore, there is no need to apply to the industrial and commercial registration authority for the establishment of a legal entity. Therefore, when contractual funds invest abroad, they can directly use the name of the fund manager to make equity investment in the target company. In the limited partnership/corporate fund, a special fund operation platform (company or partnership enterprise) must be set up, and then a series of administrative procedures need to be handled in the industrial and commercial administration department and the tax administration department, which increases the fund operation cost (including time cost and expense cost).
When the same fund manager manages multiple funds, the above advantages may be more obvious.
2. Contract funds have advantages in the entry and exit mechanism of investors and the flexibility of capital changes.
The advantages of contract funds correspond to investors, which are reflected in the flexibility of investors to withdraw (redeem fund shares); Corresponding to the fund manager, the fund manager can adjust the fund scale according to the agreement and the actual needs of fund management. For example:
First, in terms of the number of investors, the number of contract funds is greater than that of limited partnership/company funds. Where a limited partnership fund is established, the investors shall become limited partners of the partnership enterprise. According to Article 6 1 of the Partnership Enterprise Law, the number of investors shall not exceed 50; If a corporate fund is established, investors will become shareholders of the target company. In practice, corporate funds generally take the form of limited liability companies. According to the company law, a limited liability company shall have no more than 50 shareholders. As there is no independent legal entity, contractual funds are only limited by the general provisions of the Order of China Securities Regulatory Commission 105, that is, the number of qualified investors shall not exceed 200.
Second, as far as the increase or decrease of funds is concerned, the procedures of contractual funds are simplified to those of limited partnership/corporate funds. Where a company-based fund is established, a shareholders' meeting shall be held and the consent of an absolute number of voting shareholders shall be obtained before capital increase or capital decrease can be made, and the corresponding industrial and commercial change procedures for capital increase or capital decrease shall be handled; Where a limited partnership fund is established, the capital increase or decrease depends on the partnership agreement, but the capital increase or decrease also needs to go through the formalities of industrial and commercial change registration. In contractual funds, the subscription and redemption of investors depend on the agreement in the signed fund contract, and there is no need to go through the formalities of industrial and commercial change registration.
Third, as far as the external transfer of fund shares is concerned, the flexibility of contract funds is better than that of limited partnership/company funds. Where a corporate fund is established, the transfer of fund shares (equity) by investors (shareholders) is restricted by the mandatory norms of the Company Law on equity transfer, which generally requires the consent of more than half of other shareholders (other fund investors), and other shareholders have the preemptive right; Where a limited partnership fund is established, the transfer of shares or pledge to the outside world requires the consent of all partners without special agreement; However, the transfer of fund shares of contractual funds to the outside world only needs to comply with the provisions of OrderNo. 12 on qualified investors. CSRC 105, and the specific procedures and requirements for transfer and pledge can be stipulated in the fund contract.
3. Contract funds have different influences on fund managers and fund investors in internal governance structure.
Contract funds lack a mature legal system, and the rights and obligations between fund managers and investors can be freely agreed. In addition to the partnership agreement and articles of association, the governance structure of limited partnership/company fund is also regulated by the Partnership Enterprise Law, the Company Law and other business organization laws. In this way, the governance structure of contractual funds is more flexible, but correspondingly, the legal risk to fund investors is higher (for example, the supervision mechanism of investors to fund managers may be invalid). For example:
First, in terms of internal institutional responsibilities, if a company-based private equity fund is established, the shareholders' meeting is generally composed of all investors. The internal decision-making of shareholders' meeting, board of directors and board of supervisors and the division of responsibilities are all based on the Company Law, and their governance structure is relatively perfect, and the restraint mechanism of fund investors to fund managers is more effective and can better reflect the rights of fund investors; If a limited partnership fund is established, the manager is the general partner and executive partner of the fund, and the breadth and depth of "autonomy" are higher than those of corporate funds. In contractual funds, the specific division of powers, such as the decision-making power of investment direction, the decision-making power of profit distribution, and the matters that managers need to obtain the approval of the fund share holders' meeting, can be agreed in the fund contract. Therefore, the fund managers of contract funds have higher autonomy, and accordingly, it is more difficult for investors to supervise the managers.
Second, in terms of non-competition, if a company-type fund is established, directors and senior managers may not run the same business for themselves or others without the consent of the shareholders' meeting or the shareholders' meeting; Where a limited partnership fund is established, the general partner (fund manager) shall not engage in business that competes with the partnership enterprise alone or in cooperation with others, otherwise the proceeds shall be owned by the partnership enterprise. In contract funds, fund managers can manage multiple funds with different currencies, different scales and the same business scope at the same time. Unless there is a clear agreement in the fund contract, the fund manager only needs to abide by the good management obligation of treating the different funds managed fairly. Therefore, the restrictions on fund managers of contract funds are weaker.
4. Contract funds have no advantage in tax burden.
The important advantage of contract fund is that the tax burden of the fund itself is better than that of corporate fund, because it is not the subject of tax payment and there is no problem of double taxation. However, limited partnership funds also have the advantage of avoiding double taxation. Therefore, due to the imperfect tax policy, contractual funds are not obviously superior to limited partnership funds in tax burden, and may even have disadvantages.
The income of private equity investment funds mainly consists of two parts: dividends and bonuses distributed by the target company to shareholders, and the income transferred after the shares held by the target company expire.
First, if it is an enterprise fund and the project company itself belongs to the taxpayer, then its tax burden arrangement is as shown in the following figure:
Second, according to Article 8 of the Securities Investment Fund Law: "The relevant taxes and fees for fund property investment shall be borne by the fund share holders, and shall be withheld and remitted by the fund manager or other withholding agents in accordance with the relevant state regulations on tax collection." Therefore, it is generally believed that contract funds, like limited partnership funds, do not have the problem of "double taxation" and have certain advantages over corporate funds. The tax burden is as follows:
Thirdly, it must be explained that the tax advantage of contractual funds is mainly based on the theoretical discussion of trust contractual funds practice. At present, there is no clear legal norm or tax practice on how to levy taxes on this emerging contractual fund. The problem is that although contractual funds themselves are not independent taxpayers, they must make overseas investments through fund managers. If the manager is a limited liability company, the fund manager may become a taxpayer. The tax authorities may make such a treatment: the fund manager obtains the income from equity transfer, so the enterprise income tax is levied at the fund manager level. When the fund manager distributes the income to investors, investors may need to levy personal income tax again, which is essentially "double taxation". At this time, the tax burden arrangement is consistent with the company's private equity fund.
Generally speaking, compared with other forms of funds, especially limited partnership funds, contractual funds have no obvious advantage in tax burden.
5. Contract funds have disadvantages in risk isolation.
Contract fund is not an independent legal qualification subject, so it needs to act in the name of fund manager. Its risk isolation ability is weak, mainly because the independence of fund property is difficult to be recognized.
Where a company-type fund is established, the company law clarifies the independence of the company's property. Therefore, once the investor's capital contribution enters the fund operation platform of the project company, it becomes the property of the project company, and the investor only bears limited liability to the project company to the extent of the capital contribution. As the assets of the project company, fund property can be effectively independent of the property of investors and fund managers; Where a limited partnership fund is established, Article 20 of the Partnership Enterprise Law also stipulates the property independence of the partnership enterprise.
However, among the contract funds, only Order No.23 of CSRC 105 clearly stipulates: "Private fund managers, private fund custodians, private fund sales organizations and other private fund service institutions and their employees shall not engage in private fund business: (1) engage in fund property investment activities with their own property or other people's property ..." However, the foreign investment of contractual funds must be carried out in the name of the fund manager, and the current laws and regulations have other provisions. At present, there is great uncertainty whether the relevant authorities (such as people's courts, arbitration institutions and tax authorities) will recognize the independence of fund managers' own property and the different fund properties they manage.
The risk isolation disadvantage of contractual funds may lead to the fund property as the property of the fund manager, which is used to repay the debt of the fund manager, and the risk to the fund investors is greater.
Second, a brief comparative analysis of contract funds and trust funds
Contract fund can also be used to refer to trust fund, but it is significantly different from the contract fund discussed in this paper. In practice, the trust fund model is mostly used for private equity investment funds. Here is a simple analysis:
According to the provisions of the Trust Law and the Operating Guidelines for Trust Companies' Private Equity Investment Trust Business, under this model, after the trust plan is established, the trust company will personally handle trust affairs, make investment decisions and control risks independently, and the direct recipients of its management fees and performance awards are also trust companies. In this transaction structure, the trust company signs an investment advisory service contract with the fund manager alone, and the fund manager is involved in the fund operation as an investment consultant. Therefore, under this mode, the fund manager may lack sufficient influence and control over the proposed investment projects and fund operation, and it is difficult to ensure reasonable supervision over the fund operation.