During the early years of China’s economic reform, EJVs were one of the most important forms of foreign-invested enterprises in China. The Chinese government actively encouraged the establishment of joint ventures to bring foreign capital and technology into China and allowed the government to exercise a considerable degree of control over new enterprises.
An EJV must be established as an LLC and have the status of a legal entity. The parties to a joint venture may include a Chinese company, enterprise or other entity and one or more foreign companies, enterprises or individuals.
Under the law, a joint venture must promote the development of China's economy and meet at least one of the following conditions:
Adopt high-tech equipment and scientific management to increase product variety, quality, output, and save energy or materials;
Promote enterprise technology upgrades and achieve good economic benefits with less investment, faster returns and greater profits;
Produce export products and increase foreign exchange earnings; or
Makes training of technical and management personnel possible.
If approved by the government, the registered capital can include financial and non-financial assets such as intellectual property, buildings, materials or machinery. According to the law, there must be at least one foreign investor and one Chinese investor. Foreign investors usually contribute at least 25% of the total registered capital. In practice, the contribution ratio of each investor is usually closer to 50%. The profits of the joint venture will be distributed to the investors according to their equity ratio.
If a joint venture with a foreign investment ratio of less than 25% is approved for registration, the business license shall state "foreign investment ratio less than 25%". In this case, the foreign investor must provide the full investment within three months after obtaining the business license, if the investment is in cash, or within six months if the investment is in kind or industrial property. Such joint ventures cannot enjoy tax reduction treatment and other tax treatment for foreign-invested enterprises when importing equipment and goods for their own use.
Without government approval, equity cannot be transferred or withdrawn. Each party shares profits and bears risks and losses in proportion to its investment.
Chinese investors in joint ventures can greatly assist foreign investors in interacting with government officials, gaining access to labor markets and material supply sources, and, where appropriate, domestic markets.
Contract & == & Collaborative Joint Venture (CJV). A CJV is based on a contract between venture partners to develop a project with a limited duration and a specific objective, such as the construction of a building, hotel or factory.
A joint venture must be in the form of a limited liability company and have the status of a legal entity, unless the partnership contract stipulates otherwise. If the joint venture is not a legal entity, each party must pay taxes on the profits generated by the joint venture and bear its own liabilities and losses.
Advantages Disadvantages. CJVs offer greater flexibility in structuring investment contributions than EJVs because they are governed by the terms of the contract signed by the partners. The approval and registration process for CJVs is similar to that for EJVs. CJVs do not require a new business license if they are arranged contractually under the auspices of an existing JV business.
Compared with an EJV, a CJV enjoys more freedom in profit sharing. A joint venture does not require a shareholding ratio as a reference for sharing profits. The parties can agree on the method and time of profit distribution. For example, one of the parties can obtain a part of the products produced by the joint venture, or different operating years can apply to different profit sharing ratios for each party. The investment contribution of each party is not limited to financial capital, but may also include non-financial assets such as intellectual property, buildings, materials or machinery. After obtaining a fair or premium return on investment, the foreign investor returns most or all of the ownership of the enterprise to the Chinese partner.
Given its flexibility in capitalization and profit sharing, the CJV model allows foreign investors to set up joint ventures with less investment to obtain faster returns and therefore has lower risks than EJV. In addition, the contract terms can be renewed at any time and extended with government approval.
Nowadays, governments are often reluctant to allow the establishment of CJVs and most JVs are in the form of EJVs.
Setup and costs. The costs associated with establishing a joint venture depend on the type of joint venture and the capitalization decisions of the shareholders. Generally speaking, the absolute minimum registered capital for a multi-shareholder company is RMB 30,000 per investor and the absolute minimum registered capital for a single shareholder company is RMB 100,000.
The process of establishing a joint venture is complex. First, the right Chinese company needs to be found, and then the terms of the partnership need to be negotiated effectively. Choosing a partner who can make a tangible commercial contribution, protect intellectual property rights, and ensure operational control and management talent for the joint venture requires agreement.
Before initiating the FIE establishment procedure, foreign investors can use an agent to assist in the establishment. Foreign investors must now determine the FIE’s business scope before preparing the necessary documents, which generally include the following, but may vary depending on the FIE’s business scope and location:
