Setting up sino-foreign joint ventures

What are sino-foreign joint ventures?

There are two types of joint ventures involving foreign investment in China. One is called an equity joint venture (EJV), the other is called a contractual joint venture (CJV).

An EJV must be established as a legal person incorporated in China. The foreign investor(s) and the Chinese investor(s) contribute capital as set forth in the joint venture contact and take an ownership interest in proportion to their contributions to capital. The investors are said to share profits and losses accordingly, but because the EJV is established as a limited liability company, losses are ordinarily born by the company rather than by the shareholders.

Capital subscribed by the foreign investors should not be less than 25 percent of the total Registered Capital of the EJV or it will not qualify for Sino-foreign status (and the tax breaks given to such companies).

CJVs may have different arrangements for capital contribution and share ownership. CJVs may also vary somewhat the usual arrangements for risk and profit sharing. A CJV may be set up in the form of a partnership, with unlimited liability for the shareholders.

While the right to manage an EJV is usually proportionate to a party’s interest in the registered capital of the company, this need not be the case in a CJV.

The following steps need to be followed to set up a CJV or an EJV in China:

Contact with Chinese partner(s)

Chosing a proper Chinese partner is the first step. Usually a Chinese party has no authority to discuss with a foreign party the establishment of a joint venture. This authority must be obtained on the basis of a preliminary (non-binding) agreement with the proposed partners.

Initial agreement

After the initial contact between the parties, a preliminary agreement, or memorandum of understanding should be signed. This document outlines the parties' intention to pursue the establishment of a joint venture and gives the Chinese party a basis to request from the regulatory authorities the authority to follow up. If the Chinese party does not obtain this authority the government approval agencies are free to deny the parties the opportunity to establish the joint venture.

Preparing a Project Proposal and preliminary Feasibility Study Report to get preliminary approvals

The Chinese party will prepare a Project Proposal and a preliminary Feasibility Study Report and submit these together with various other documents to the appropriate government authorities for ipreliminary approval. The preliminary approval authorizes the Chinese party to continue negotiations with the foreign partner(s).

Negotiation with Chinese partners

Once the preliminary approval is obtained, the proposed joint venture parties must prepare a formal feasibility study report, a joint venture contract and articles of association. The joint venture contract is the fundamental contract governing the rights and obligations of the parties to the joint venture. The articles of association contain further details regarding management of the joint venture.

Getting the CJV or EJV approved

The formal feasibility study report together with the joint venture contract and articles of association must be submitted to the appropriate government authority for approval. The approval authority may differ depending on location and the proposed business of the joint venture. The time limit for approval of the joint venture contract and articles of association may be difficult to estimate, but there are ways to control possible delays.

Registration with the Administration of Industry and Commerce The proposed name of the joint venture should be reviewed by the local Administration for Industry and Commerce well in advance in order to ensure availability of the name for the joint venture parties. If the name is available, the local Administration for Industry and Commerce will issue a Notice of Enterprise Name Reservation, valid for 6 months. During that period, the reserved name is not available for a third party to use. The reservation of the name does not constitute approval of the joint venture, however. That approval is given by a different authority. Within 30 days after the approval to establish the joint venture is given, the investors should apply for the registration of the joint venture with the local AIC that has approved the name. The AIC then issues a business license for the joint venture within the next 30 days. The date on which the business license is issued is the date of establishment of the joint venture.

What needs to be done after the Business License is issued?

After the issuance of the Business License, some further registrations will be necessary:

Application procedure for an enterprise code (in bar code form);
Foreign exchange registration and approval to open bank accounts;
Tax registration;
Financial registration;
Customs registration;
Application with the local public security bureau for approval to make chops (company seals);
Labor registration

Tax incentives for joint ventures

The basic income tax rate is 30 percent for national tax and 3 percent for local tax, altogether 33 percent of net income (calculated in various ways, as stipulated under Chinese tax and accounting regulations).

For joint ventures engaging in manufacturing with a term of more than 10 years, there is a 2 year income tax exemption and a further 3 year 50 percent reduction on the income tax from the joint venture’s first profit-making year. Joint ventures engaged in services such as real estate development, tourism, retailing, etc., are not eligible for the tax holiday.

There are further tax incentives for specific industries, further incentives applicable to certain special investment zones, and further incentives on income tax refunds in event of reinvestment with another foreign investment in China.

For further information and guidance please contact Luke Filei on [email protected] or +86 10 6590 0389 in Beijing or +86 21 6289 6363 in Shanghai.