China JV Setup
China JV Setup Service
Hotline: 86-755-82143512, Email:email@example.com
A Joint Venture is a business arrangement in which the participants create a new business entity or official contractual relationship and share investment and operation 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.
China JV setup-2 types of Joint Venture
Equity joint venture (EJV): the most common of the two types of statutory joint venture. An EJV is a legal person company invested in together by both foreign and domestic corporate investors. The equity interests of the investors, and the division of profits, is strictly proportional to their shares of contributed registered capital;
Cooperative joint venture (CJV): CJVs are normally established as legal person limited companies, but may also be established as a non-incorporated contractual cooperation. The liability of the partners in an unincorporated CJV is unlimited, and investors tend to have greater flexibility. Non-incorporated CJVs are typically only established for specific limited purposes and activities such as collaboration in natural resources exploration and venture capital investments;
China JV setup-Nature of JV Project
1. The principal differences between an EJV and a CJV can be simply summarised as follows:
- For an EJV:
Each party must make cash or permitted contributions in proportion to its subscribed percentage of the EJV's registered capital.
Profit must be distributed strictly in accordance with the parties' respective percentage shareholding of the registered capital of the EJV.
Upon dissolution of the EJV at the expiry of the term of operation, the EJV's net assets are to be distributed to each party in accordance with its respective shareholding of the EJV's registered capital.
- For a CJV:
A party (typically, but not always, the Chinese party) may contribute non-cash intangibles in the form of "cooperative conditions". Such "cooperative conditions" may consist of market access rights, rights to use buildings or office space owned or leased by the party that are not subject to clear valuation. In exchange for such "cooperative conditions", the party is entitled to participate in the distributable earnings of the CJV.
Profit sharing in a CJV need not be made strictly in accordance with the parties' respective percentage shareholding of the registered capital of the CJV but can be made in accordance with the agreement of the parties (e.g. the Chinese party may be entitled to a fixed profit share with the balance to be distributed to the foreign party, or the parties may agree on a multi-tiered profit-sharing arrangement that permits the foreign party to recover an amount equal to its capital investment on a priority basis, following which the profit split will be changed, etc.).
Upon dissolution of the CJV at the expiry of the term of operation, the CJV's net assets may be transferred to the Chinese party without compensation (thus operating in many respects as a BOT project) so long as the foreign party has been able to recoup its capital contribution during the term of the CJV. Such recoupment typically is funded by excess cash flow generated by accelerated depreciation of the CJV's assets. Such arrangement requires approval of relevant finance and tax authorities in China. Note that this capital recoupment is separate and distinct from possible priority rights to receive after-tax net profit distributions as outlined in the bullet point above.
China JV setup-Capitalization of JV
1. The concepts of authorized and issued capital are not used in connection with Sino-foreign joint ventures. Instead, the concepts of "registered capital" and "total investment" are employed. Under applicable PRC law, registered capital is defined as the total amount of capital contributions subscribed to by the parties and registered with the Chinese authorities. Thus, the term "registered capital" refers to the parties' equity in the venture. The concept of "total investment", on the other hand, includes both registered capital and external borrowings.
2. Pursuant to regulations promulgated by the SAIC, certain minimum equity requirements are imposed on joint ventures.
3. The capital to be injected by the parties constituting their capital contribution may take a variety of forms including cash, machinery, equipment and intangible property, such as proprietary technology, trademarks and other industrial property rights. Pursuant to a circular promulgated by SAFE and effective as of 1 April 2003, subject to SAFE's approval, a foreign party may also use the assets obtained by way of early recoupment of investment, liquidation, share transferring, capital reduction etc. from FIEs it has previously invested in. In addition, the Chinese side may contribute the right to use a site and count this as part of its contribution.
4. Chinese law permits joint ventures to borrow funds from either Chinese or foreign banks in excess of the parties' capital contributions. Shareholder loans from the foreign party are also permitted. (Chinese partners likely will not have a sufficiently broad scope of business to permit them to provide shareholders loans.) All such loans should be registered with SAFE and should not exceed the difference between the registered capital amount and the total investment amount.
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