REGISTRATION OF SINO-FOREIGN EQUITY JOINT VENTURES
Introduction to Sino-Foreign Equity Joint Venture
Equity
joint ventures are the second most common manner in which
foreign companies enter the China market and the preferred
manner for cooperation where the Chinese government and Chinese
businesses are concerned. Joint ventures are usually established
to exploit the market knowledge, preferential market treatment,
and manufacturing capability of the Chinese side along with
the technology, manufacturing know-how, and marketing experience
of the foreign partner.
Normally operation of a joint venture is limited to a fixed
period of time from thirty to fifty years. In some cases an
unlimited period of operation can be approved, especially
when the transfer of advanced technology is involved. Profit
and risk sharing in a joint venture are proportionate to the
equity of each partner in the joint venture, except in cases
of a breach of the joint venture contract.
Share holdings in a joint venture are usually non-negotiable
and cannot be transferred without approval from the Chinese
government. Investors are restricted from withdrawing registered
capital during the live of the joint venture contract. Regulations
surrounding the transfer of shares with only the approval
of the board of directors and without approval from government
authorities will probably evolve over time as the size and
number of international joint ventures grow.
There are specific requirements for the management structure
of a joint venture but either party can hold the position
as chairman of the board of directors. A minimum of 25% of
the capital must be contributed by the foreign partner(s).
There is no minimum investment for the Chinese partner(s).
It is preferable that foreign exchange accounts are balanced
in order to remit profits abroad so that the repatriated foreign
exchange is offset by exports from the joint venture. With
the elimination of foreign exchange certificates and the further
opening of the China market, this requirement is becoming
more and more relaxed.
The permissible debt to equity ratio of a joint venture is
regulated depending on the size of the joint venture. In situations
where the sum of debt and equity is less than US$ 3 million,
equity must constitute 70% of the total investment. In joint
ventures where the sum of the debt and equity is more than
US$ 3 million but less than US$ 10 million, equity must constitute
at least half of the total investment. In cases where the
sum of the debt and equity is more than US$ 10 million but
less than US$ 30 million, 40% of the total investment must
be in the form of equity. When the total investment exceeds
US$ 30 million, at least a third of the sum of the debt and
equity must be equity.
Equity can include cash, buildings, equipment, materials,
intellectual property rights, and land-use rights but cannot
include labor. The value of any equipment, materials, intellectual
property rights, or land-use rights must be approved by government
authorities before the joint venture can be approved.
After a joint venture is registered, the entity is considered
a Chinese legal entity and must abide by all Chinese laws.
As a Chinese legal entity, a joint venture is free to hire
Chinese nationals without the interference from government
employment industries as long as they abide by Chinese labor
law. Joint ventures are also able to purchase land and build
their own buildings, privileges prevented to representative
offices.
Related Topics:
Termination of Foreign
Invested Enterprise
Registration of Wholly
Owned Enterprise in China
Registration of Representative Office
in China
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