7 January 2021
Joint China: A guide to Equity Joint Venture and Contractual Joint Venture Enterprises
With over 1.4 billion potential consumers and a wide array of potential business opportunities, China is one of the fastest growing economies in the world. Because of this, many foreign companies consider setting up a base, a branch, or a representative office in China.
If you are a foreign company moving to China, you must consider numerous factors: What are your business’s needs? Is it trading, manufacturing, exporting or plain networking? Depending on your choices It may not be necessary to establish a legal presence in China, with all of that in mind. Do you have limitations for incorporation requirements or China’s tax systems? Do you want to have any incentives from the local government whilst you are working in that region? And lastly what are you looking for your products material? Are there any specific supply chain that you need to establish for specific industries in different regions? All these factors and decisions go into what makes your company in China stand out and what it will need to take to make your business successful.
Once you have decided on the type of approach and location you wish to use for your setup, You need to start preparing your company for due diligence. Foreign companies specifically need to keep an eye out for the following things:
- Adapting the procedures and requirements for company incorporation and licence applications applicable to their own business type and selected regions.
- Complying with foreign currency controls on fund transfers in and out of China
- Make sure you meet the requirements of various layers of tax systems and archetypes.
- Comply and conform with cultural differences at the country and district levels in terms of in-person and e-commercial concepts as well as employer-employee and social relationships.
Primasia has already gone into detail about the PRC’s government publication system and the do’s and don’ts on remaining compliant on its normal laws. In summary, the PRC covers the follow categories for all industries and services. These are: “encouraged”, “permitted”, “restricted” and “prohibited” categories. Industries relating to environmental protection, improving extraction of natural resources, waste management, energy efficiency, venture capital and IP are among some of the industries that are “encouraged” in China. Primasia has already written an article going into detail about these 4 categories and the main characteristics of both Wholly Owned Enterprises (WFOEs) and representative Offices (ROs). In this article I will be going over the remain types of foreign investment set-ups: Equity Joint Venture Enterprises (EJV) and Contractual Joint Ventures Enterprises (CJV).
Equity joint venture (EJV) enterprises
These are enterprises established in China as a result of joint investment with foreign individuals, firms and/or Chinese economic organizations, based on the principle of equality and mutual benefits, and subject to approval by the Chinese government.
An EJV takes the form of a limited liability company with the status of a Chinese legal entity. It requires joint contributions of both parties in the investment, operation, share of profits, risk, and losses, in strict proportion to the amount of investment offered by the foreign investor should be at least 25 percent. Investment can be in form of cash, real estate, industrial property, equipment, and technology, but these types of investment need to count as different shares in the investment deal.
Contractual Joint Venture Enterprises (CJV – also known as cooperative joint ventures)
As for the EJV, CJVs are established in China as a result of joint investment or cooperation with foreign individuals, firms and/or Chinese economic organizations, based on the principle of equity and mutual benefit, and subject to approval by the Chinese government.
However, a CJV has more flexibility in terms of contractual freedom and structure; that is, profits and losses are distributed between the Chinese party and the foreign investor in accordance with specific contractual provisions, as opposed to their respective equity interests in the CJV.
Capital contributions to both EJV and CJV can be in cash or in kind, such as buildings, machinery, materials, and know-how. For a CJV, the parties can decide how the value of their contributions should be determined, whereas for an EJV, this evaluation process normally needs an independent third party to assess the “market price” of the contribution.
A CJV project usually involves the foreign partner providing most or all the funds and technology as well as key machinery, whilst the Chinese partner contributes land, facilities, natural resources and perhaps a limited amount of funding. However, China’s economic environment has changed. Land has become a rare resource and Chinese companies are not short of money; therefore, nowadays forming a CJV has become a far less popular option in comparison to forming a ‘RO’ or a ‘WFOE’ in the market.
Primasia has a vast variety of services to help you incorporate your business into China. Primasia has over 20 years of experience across three major cities in China being: Beijing, Shanghai, and Guangzhou. We also specialize in multiple industries allowing us to provide with as much guidance and control over your business in this ever-change marketplace. If you wish to learn more information about our China incorporation services, please have a look at our website.
Primasia Corporate Services is a Hong Kong based corporate services provider that has been supporting its clients in Asia for over three decades. Among several of our services, Primasia Hong Kong (Primasia) offers our clients Online Accounting services, China Company Incorporation services, Virtual CFO services, MPF Filing services, Profit tax filing services, Employment return filing services, Wholly Foreign Owned Enterprise (WFOE) incorporation and registration services etc. One of our services which we are proud to be offering our clientele is our investment visa and working visa Hong Kong services.
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With over 1.4 billion potential consumers and a wide array of potential business opportunities, China is one of the fastest growing economies in the world. Because of this, many foreign companies consider setting up a base, a branch, or a representative office in China. If you are a foreign company moving to China, you […]