Registration of Joint Ventures
A joint venture is a business arrangement in which the participants create a new business entity or official contractual relationship and share investment and operational expenses, management responsibilities, and profits and losses. The Chinese authorities encourage foreign investors to use this form of company in order to obtain exposure to advanced technology and new management skills. In return, foreign investors can enjoy low labor costs, low production costs and a potentially large Chinese market share.
Joint ventures are sometimes the only way to register in China if a certain business activity is still controlled by the government (e.g. restaurants, bars, building and construction, car production, cosmetics, etc.).
What are the TOP 3 Biggest Challenges that foreign companies face when contemplating doing business in China?
- Who do trust? Whether it is a JV partner, company or property owners?
- How do you navigate application process to Chinese government institutions?
- How to maintain effective operations after you have set up.
GMG together with its strategic partners proven on the field can assist you:
- Through due diligence, we counsel on the risk factors.
- Vast experience obtaining all required licenses, permits and documentation.
- We are your eyes and ears on the ground ready to be on site and solve issues.
China’s emergence as a world economic power is changing the global political and economic landscape and it is profoundly rebuilding the competitive capabilities of multinational companies.
In China you can establish different types of JV. Please have a look below to find suitable JV for your business:
Sino-Foreign Equity Joint Venture (EJV)
A Sino-foreign equity joint venture (EJV) is another method through which foreign companies are able to enter the Chinese market. It is the second most common method, however it is the preferred manner for co-operation where the Chinese government and Chinese businesses are concerned. These types of venture are limited liability.
The establishment of EJVs is usually to enable resources and knowledge from both the Chinese and the foreign side to be used. On the Chinese side, the establishment of an EJV allows their market knowledge, preferential market treatment and the manufacturing capability to be exploited, whereas on the side of the foreign partner, the technology, knowledge of manufacturing and marketing experience may be utilized.
In an EJV the share holdings are usually non-negotiable and without approval from the Chinese government they may not be transferred. Investors are unable to withdraw registered capital whilst the EJV contract exists.
As the number and the size of international EJVs continue to grow, it is likely that the regulations that surrounding the transfer of shares that have approval from the board of directors, and not from government authorities, will evolve.
The management structure within an EJV must meet certain specific requirements, however the position of chairman of the board of directors may be held by a member of either party. The Chinese partners do not have a minimum investment amount that they must contribute, however the foreign partner must contribute a minimum of 25% of the capital. The respective shares in registered capital of the foreign and Chinese investors will determine the proportion of profits and losses, in addition to the risks, that they take.
Foreign exchange accounts should be balanced in order to remit profits abroad and so that the repatriated foreign exchange will be offset by exports from the EJV. However, as the Chinese market opens up further and with the elimination of foreign exchange certificates, this requirement is getting more relaxed, so although it is preferred it is not necessary.
Once the EJV has been registered it will be considered a Chinese legal entity and must therefore follow Chinese laws. This status also means that an EJV is able to hire Chinese nationals without having the interference of government employment industries. Furthermore, EJVs are able to purchase land and build new buildings, both of which ROs are unable to do.
Sino-Foreign Contractual Joint Venture
In a Sino-foreign contractual joint venture (CJV, also known as a cooperative joint venture), it is possible for the different parties to operate as independent legal entities and therefore endure the liabilities separately, rather than as a single entity.
It is possible for a CJV to be registered as limited liability, which will resemble an equity joint venture in it structure, the way it operates and its status as a Chinese legal entity.
For the foreign investor, there is no minimum contribution that needs to be met in order to initiate a CJV and it is possible for a foreign company to remain a minor shareholder in the enterprise. The contributions made by the investors can include a variety of services, resources or labour and need not only be expresses in monetary terms.
The division of profits made in a CJV will be determined by the terms set out by the CJV contract, rather than by the investment shares. It may be the case that the Chinese party will contribute mainly land, buildings or machinery whilst the foreign investor will contribute capital. In this case the CJV will ensure that there is a more flexible plan for the return on investment.
Increased flexibility within the CJV structure is possible, including management and organizational structure, as well as structure of the assets.
There are no conditions for the duration of the CJV, and the contact may be extended if there is consent of the parties involved and if the authorities approve of the contract renewal. During the duration of the contact the foreign investor may withdraw their registered capital, or a portion of it, from the CJV.
Trade unions are allowed to represent the employers in employment matters, which is one of the bonuses offered to the foreign investors in the CJV.
The main differences between an EJV and a CJV
For an EJV:
- Each of the parties must make cash or other contributions proportionate to the percentage they have invested in the EJV’s registered capital.
- The profit made must be shared between the parties, according to their respective percentage shareholding of the EJVs registered capital.
- Upon termination of the EJVs operation, the EJV’s net assets must be divided amongst each party according to their respective shareholding in the EJV’s registered capital.
For a CJV:
- A party (generally the Chinese party, however not always) may contribute resources, or other alternatives to capital investment, in the form of “cooperative conditions”. These conditions may include the rights to use a particular building, market access rights, or the right to use offices owned or leased by the party. In exchange for these resources, the party will receive a proportion of the CJVs earnings.
- Profit sharing in a CJV does not only have to be made strictly according to the parties’ respective percentage shareholding of the CJVs registered capital but may also be made with the agreement of each party. For example, the Chinese party may be entitled to a certain profit share with the balance to be distributed to the foreign party, or the parties may agree on a multi-leveled profit-sharing system that allows the foreign party to recover an amount equal to its capital investment on a priority basis, following which the profit split will be changed.
- Once the CJVs term of operation expires, the net assets may be transferred to the Chinese party without compensation, as long as the foreign investor has been able to retrieve its contribution of capital during the term of the CJV. However this arrangement will require approval from certain Chinese finance and tax authorities. Decampment is generally funded by the accelerated depreciation of the CJVs assets, which will result in excess cash flow.
- Joint ventures are permitted by Chinese law to borrow funds, in excess of the parties’ capital contributions, from Chinese or foreign banks.
- Shareholder loans from the foreign party are allowed, however shareholder loans from the Chinese party are unlikely to be permitted as it is likely they will not have a sufficiently broad scope of business.
The minimum time for joint venture registration is 3 months.
With over than 7 years experience we helped hundreds of companies to successfully set up in China’s development zones.
Today, you can make this process online quick and easy – just visit our service page & pay 50% of total sum to start. After all documents will be prepared you’ll pay last 50%.
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