A China Joint Venture (JV) is a Limited Liability Company (LLC) formed through a partnership between a foreign investor and a Chinese company or individual, often referred to as a Sino-Foreign Joint Venture. JVs are commonly used as legal investment vehicles to access business sectors in China that are otherwise restricted or prohibited to foreign entities.
Companies may opt for a Joint Venture (JV) as their preferred method of entering and conducting business in China for several reasons. These include leveraging local market expertise, mitigating risks, and circumventing foreign investment restrictions. The Chinese Joint Venture enables foreign entities to effectively establish a presence in the Chinese market. This white paper outlines the key considerations for establishing a JV in China, explains its operational mechanics, and details the application procedures.
What is a China Joint Venture (JV)?
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: the Equity Joint Venture (EJV) and Cooperative Joint Venture (CJV). In the EJV, the equity investment of the respective shareholders is equal to the shareholding ratio. In contrast, 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 Law previously governed the EJV and CJV on Sino-Foreign Equity Joint Ventures and the Law on Sino-Foreign Cooperative Joint Ventures.
However, as of 1 January 2020, there are no distinctions between the two types of Joint Ventures, and a JV is now established by the Company Law. The Company Law indicates that Joint Ventures can be established in organizational structures as either a limited liability or joint-stock company.
China’s Company Law introduced the new foreign investment law and simplified foreign-invested business ventures. The law aims to increase foreign investment in China and promote a more fair and equal treatment of foreign and domestic enterprises.
Updates in 2024
Revised Company Law
The revised Company Law, Effective July 1, 2024, introduces significant changes that impact the governance and operational structure of JVs. These include enhanced corporate governance standards and stricter compliance requirements.
Foreign Investment Law
The five-year transition period for the Foreign Investment Law, which began in 2020, concludes at the end of 2024. This law emphasizes aligning foreign-invested enterprises with domestic company regulations, affecting JVs.
Encouraged and Restricted Sectors
The updated investment catalog outlines specific sectors where foreign investment is encouraged or restricted, impacting the strategic planning of JVs.
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 and how to access local opportunities is a complicated and challenging process. Possible entry modes depend 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 legal and non-legal personnel: 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 from the other available entities is that a Chinese partner, whether a natural or juristic person, is required.
Foreign investors need to carefully consider the rights and responsibilities of the shareholders when establishing a joint venture and use 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 daily business. Depending on which shareholder 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:
1. A specific industry sector is restricted, and foreign investment is only permitted through a Joint Venture.
2. Gaining access to existing networks of local Chinese partners or local market knowledge through a partner.
Other Modes of Entry into China
Wholly Foreign-Owned Entity in China
Like a joint venture, a wholly foreign-owned entity (WFOE) is recognized as a limited liability company. However, a WFOE is formed exclusively with a foreign investor’s capital.
The following differences can identify the three types of WFOEs:
- 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 to be active in consulting or trading.
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 has no requirements for registered capital, it is limited in business scope. As such, it is only permitted to perform marketing and research activities for the headquarters and is not allowed to engage in any activities for commercial purposes. Furthermore, a representative office cannot 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 before the application for a joint venture business license, and it should be done by Chinese legislation. This agreement, among other things, regulates in detail the shares of each party, profit distributions, procedures in the event of liquidation, etc.
The Articles of Association set out the rules of governance for the Joint Venture and include other information about the company’s scope of business activities.
Business Scope
The business scope outlines the planned activities for a company’s operations in China and is discussed in the company’s business license. Information on the business scope is accessible to the public through the company’s registry on the Chinese Administration for Market Regulation (AMR) website.
Registered Capital & Total Investment
Total equity or capital contributions from the Joint Venture’s shareholders are 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.
Registered Personnel
Board of Shareholders
The Board of Shareholders is recognized as the highest authority in a Joint Venture. It comprises shareholder representatives whose details are outlined in the shareholder agreement and the company’s Articles of Association.
Board of Directors
The Board of Directors manages the Joint Venture and is appointed by the Board of Shareholders.
Legal Representative
A legal representative with equal authority to the chairman of the board of directors or the executive director must be appointed for the joint venture. The details of the Legal Representative need to be filed with the local Administration for Market Regulation.
Supervisor
One natural person is required to be appointed as Supervisor or a designated Board of Supervisors with no less than 3 members by the New Foreign Investment Law.
General Manager
While not a required designation, the company can appoint a General Manager to govern day-to-day activities.
Registered Address
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.
Company Name
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:
1. Company chosen name
2. Major business activity that the company will perform
3. Region or place of incorporation
4. 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. On average, joint ventures take 5 and 6 months to fully operational, without accounting for time spent negotiating between Joint Venture partners. Factors affecting 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 the 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
When the structural details have been determined, the company can register for an online pre-approval for structural decisions and name registration.
Application with the Administration for Market Regulation (AMR):
The official application with the AMR can be submitted after 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:
After issuing the business license, the company can continue carving company chops. These chops serve as the company’s representative signatures 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 bank accounts to become fully operational:
1. RMB Basic Account
2. Foreign Capital Account
Tax Registrations:
Within 30 days of the entity’s legal existence, the foreign-invested company must comply with tax filing requirements 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, an application for an import/export license must be completed with the local customs authority, as well as access to the E-port operator system.
Application for Other Licenses (if applicable)
Industry-specific licenses, such as an alcohol distribution license, may also be required for a joint venture to become operational.
Compliance Requirements After Establishment
Following the legal establishment of a subsidiary and possession of a business license, businesses in China must complete several administration and compliance requirements monthly, quarterly, and annually.
Advantages and Disadvantages of a Joint Venture
Advantages
Advantage 1: Negative List for Foreign Investment
Certain business areas and activities in China have been restricted for foreign investors. The ‘Negative Lists’ provide administrative guidance and a regulatory framework for different industries and sectors and outline the specific sectors for which foreign investment is restricted or prohibited.
If the negative list prohibits or restricts an investor from 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 fully understand 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 gain access to the partner’s expertise and network in the local market.
The Chinese market is not easy for new investors, and having a partner to guide the foreign investor through local procedures or provide them with insights, experience, distribution channels, and networks may benefit the outside party.
Advantage 3: Shared liability
When entering China with a partner, the business’s liability is shared. As such, this may benefit parties who do not wish to assume the full risk and liability of the endeavor. This may also reduce an investor’s capital burden if they set up a WFOE.
Disadvantages
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 over the business decisions. 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 has 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 with their Chinese partners. While the difference in culture is often 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.
About MSA
Over the past decade, MSA has helped more than 3,000 SMEs and large corporations register businesses in China. With an emphasis on quality and transparency, we ensure the very best service delivery to all our clients in accounting, financial advisory, business setup, and more. Contact 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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