Joint Venture in China
A Joint Venture is a Limited Liability Company (LLC) which is established through a partnership between a foreign investor and a Chinese company or individual (hence the name Sino-Foreign Joint Venture). JVs are legal investment vehicles frequently utilized to access areas of business in China which are restricted or prohibited.
There are various reasons why a company may want to use a Joint Venture (JV) as their preferred entity to enter and do business in China. Whether it is to gain access to expertise in the local market, mitigate risk or bypass foreign investment restrictions, the Chinese Joint Venture allows for foreign entities to get set up in the Chinese market. We have prepared this white paper to address the most important considerations when establishing a JV in China, explain how it works and set out details of the application procedures.
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What is a China Joint venture?
A Sino-Foreign Joint Venture can be defined as a Limited Liability Company, established between a Chinese company or individual and a foreign investor. Chinese Joint Ventures were distinguished in the past as being either one of two types, namely the Equity Joint Venture (EJV) and Cooperative Joint Venture (CJV). In the EJV the amount of equity investment of the respective shareholders to be equal to the shareholding ratio where as in the CJV the shareholding ratio is set out in the company’s Articles of Association and does not necessarily need to reflect the shareholders’ respective equity commitments. The EJV and CJV were previously governed by the Law on Sino-Foreign Equity Joint Ventures and Law on Sino-Foreign Cooperative Joint Ventures, respectively.
As of 1 January 2020 however, there are no distinctions between the two types of Joint Ventures and a JV is now established in accordance with the Company Law. The Company Law indicates that Joint Ventures can be established in organizational structures as either a limited liability company or join-stock company.
When the new foreign investment law was introduced, it was aligned with China’s Company Law and has resulted in foreign-invested business ventures becoming less complicated. With ultimate aims to increase foreign investment into China, the new foreign investment law is intended to adopt a more fair and equal treatment of foreign and domestic enterprises.
A comparison of legal investment vehicles
For foreign businesses exploring possible modes of entry into the Chinese market, deciding on the most appropriate investment vehicle, as well as how to access local opportunities, is a complicated and challenging process. Possible modes of entry are dependent on multiple criteria including the type of industry and business activities they are participating in. The new Foreign Investment Law focuses on three primary investment vehicles to be considered by both legal and non-legal personnel which are a Joint Venture, a WFOE and a representative office.
Joint Venture with China
As stated above, a Sino-Foreign Joint Venture can be classified as a Limited Liability Company, established by a Chinese partner and foreign investor. The major difference to the other available entities is that a Chinese partner, whether a natural or juristic person, is required.
Foreign investors need to pay careful consideration to the rights and responsibilities of the shareholders when establishing a Joint Venture and make use of a credible service provider when drafting official company documents. This is because shareholders operating in a Chinese business environment do not always have direct control of subsidiaries, especially in terms of daily business. Depending on which shareholder is has direct access to the company chops or bank tokens and which party holds supervising roles, managing a Joint Venture can be more complicated for companies with limited experience in the Chinese market.
Despite additional complexities that are associated with establishing and operating a Joint Venture, two reasons have been identified for why a Joint Venture is a preferable mode of entry:
- A specific industry sector is restricted, and foreign investment is only permitted through a Joint Venture.
- Gaining access to existing networks of local Chinese partners or to local market knowledge through a partner.
Other modes of entry into China
Wholly Foreign-Owned Entity in China
Similar to a Joint Venture, a Wholly Foreign-Owned Entity or WFOE is recognized as a limited liability company. However, a WFOE is formed exclusively with a foreign investor’s capital.
The three types of WFOEs can be identified by the following differences:
- The Consulting WFOE: for businesses who wish to operate as a consulting business within the service industry, with licensed approval.
- A Trading WFOE: licensed to carry out wholesale, retail, and franchising activities in China, as well as certain consulting services.
- A Manufacturing WFOE: Licensed to undertake manufacturing and production activities, but also the ability of being active in consulting or trading.
WFOE in China
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China Representative Office (RO)
Recognized as a form of “branch” for a company’s head office, the Representative Office is not considered a separate legal entity. While a representative office does not have any requirements for registered capital, they are limited in terms of business scope. As such, they are only permitted to perform marketing and research activities for the headquarters and as such are not allowed to engage in any activities for commercial purposes. Furthermore, a representative office is unable to hire local Chinese staff and issue fapiaos. – the official Chinese invoicing method.
Important Considerations for JV Establishment
Shareholder Agreement & Articles of Association
The complex nature of managing a Joint Venture is primarily due to the involvement of multiple shareholders with potentially diverging interests. The shareholder agreement needs to be prepared prior to the application for a Joint Venture business license and should be done in accordance with Chinese legislation. Among others, this regulates in detail the shares of each party, profit distributions or procedures in the event of liquidation, etc.
The Articles of Association set out the rules of governance for the Joint Venture and includes other information with regards to the company’s scope of business activities.
The business scope outlines the planned activities for a company’s operations in China and is discussed in the company’s business license. Through the company’s registry on the website of the Chinese Administration for Market Regulation (AMR), information on the business scope is accessible to the public.
Registered Capital & Total Investment
Total equity or capital contributions from the shareholders of the Joint Venture is known as registered capital. Normally, registered capital is tax-free and contributed either in cash (foreign-currency or RMB) or in the form of value-generating assets like technology and machinery.
Board of Shareholders
Recognized as the position of highest authority in a Joint Venture, the Board of Shareholders consist of shareholder representatives whose details are outlined in the shareholder agreement and company’s Article of Association.
Board of Directors
The Board of Directors manage the Joint Venture and are appointed by the Board of Shareholders.
It is required that a Legal Representative be appointed for the Joint Venture, who has equal authority to the Chairman of the Board of Directors or the Executive Director. The details of the Legal Representative need to be filed with the local Administration for Market Regulation.
One natural person is required to be appointed as Supervisor or a designated Board of Supervisors with no less than 3 members, in accordance with the New Foreign Investment Law.
While not a required designation, the company is able to appoint a General Manager to govern day-to-day activities.
It is a requirement for any company to register an official address, with proof to be provided during the registration process. It is necessary to hold a lease agreement before submitting the documents for application with the Administration for Market Regulation, as you must state the district in which your company is situated during the name registration process.
The official legal company name in China is the Chinese name, which is to be registered with all major governmental authorities. The legal name must adhere to the following legal format:
- Company chosen name
- Major business activity that the company will perform
- Region or place of incorporation
- Legal structure of the company
Companies are also allowed to choose an unofficial English name in addition to the Chinese name, which is to be registered with the Ministry of Finance and Commerce (MOFCOM).
Setting up a China Joint Venture
The corporate establishment process for Joint Ventures in China is conditional upon various laws, and regulations from governmental authorities. It is typical for Joint Ventures on average to take between 5 and 6 months to become fully operational, without accounting for time spent on negotiation between Joint Venture partners. Factors that can affect the setup time include the chosen vehicle for investment and planned business activities.
Structural Decision-making & Document Preparation
Company shareholders must decide on the details of organizational structure and prepare relevant documents for the Joint Venture application during the first phase.
Pre-Business License Application Processes
Pre-approval and Name Registration
The company can register for an online pre-approval for structural decisions and name registration when the structural details have been determined.
Application with the Administration for Market Regulation (AMR):
The official application with the AMR can be submitted following the receipt of signed application documents and legalized documents from the investors. The business license can be issued following approval from the AMR, which marks the legal existence of the Chinese subsidiary despite it not being fully operational yet.
Carving of Company Chops:
The company can continue with the carving of company chops after the business license is issued. This serves as representative signatures of the company and can make documents legally binding.
Post-Business License Application Process
Bank Account Opening:
It is required that a Joint Venture inject capital and the following back accounts to become fully operational:
- RMB Basic Account
- Foreign Capital Account
Within 30 days following the entity’s legal existence, the foreign invested company is required to meet compliance requirements for tax filing and begin basic tax registration procedures.
Import/Export License Application (if applicable)
For any import and export activities that the Joint Venture intends to engage in, it is required that an application for an import/export license be completed with local customs authority as well as access to the E-port operator system.
Application for Other Licenses (if applicable)
Industry specific licenses may also be required for a Joint Venture to become operational, such as an alcohol distribution license.
Compliance requirements after establishment
Businesses in China are required to complete a number of administration and compliance requirements on a monthly, quarterly and annual basis following legal establishment of a subsidiary and possession of a business license.
Joint Venture in China advantages and disadvantages
Advantage 1: Negative List for Foreign Investment
In China, there are certain business areas and activities which have been restricted for foreign investors. The ‘Negative Lists’ provide administrative guidance and a regulatory framework for different industries and sectors, which outline the specific sectors for which foreign investment is restricted or prohibited.
If the negative list prohibits or restricts an investor entering China through a WFOE, participation in the industry may still be permitted through a China Joint Venture.
Advantage 2: Expertise of a local partner
Foreign investors often do not have a complete understanding about various aspects of China’s legal and regulatory framework, and how the market works. By entering the market with a local partner an investor may get access to the partner’s expertise and network in the local market.
The Chinese market is not an easy market for new investors and having a partner to guide the foreign investor through local procedures or providing them with insights, experience, distribution channels and networks, may be beneficial to the outside party.
Advantage 3: Shared liability
When entering China with a partner, the liability of the business is shared. As such, this may be beneficial to parties who do not wish to assume the full risk and liability of the endeavor. This may also reduce the capital burden that an investor would invest if they were to setup a WFOE.
Disadvantage 1: Less control of the decisions of the business
As with most partnerships, the decision-making power is often shared between partners. As such, an investor will not have total control of the decisions made over the business. Often this could lead to difficulties between the parties, which is why emphasis is placed on the initial setup, where the parties can clearly outline the powers and restrictions of each party.
Disadvantage 2: Sharing of information
If the investor is in possession of highly sensitive information or specific technology, that may have to be shared with their Chinese partner. While foreign investors may want to keep their trade secrets, it would be difficult to restrict your partner from such information.
Disadvantages 3: Differing management styles
A major challenge many investors often overlook is the differing management styles they may have to their Chinese partners. While often the difference in culture is acknowledged, it is common to find that the partners have divergent management styles that can cause conflict. For this reason, many foreign companies often elect to outsource CFO services to ensure they have an objective understanding of how the enterprise is being managed and is performing.
Moore MS Advisory
As part of the Moore Global Network, Moore MS Advisory has helped numerous SMEs and large corporations with their business setup in China over the past decade. With an emphasis on quality on transparency, we ensure the very best service delivery to all our clients in accounting, financial advisory, business setup and more. Get in touch with us right away to find out more or fill in the form to receive your free copy of our Joint Venture white paper.
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