Joint Ventures Guide in China

"Businesses once grew by one of two ways; grass roots up, or by acquisition...Today they grow through alliances - all kinds of dangerous alliances. Joint ventures and customer partnerings which, by the way, very few people understand." - Peter F. Drucker

TABLE OF CONTENTS

Introduction

Motives to establish a Joint Venture in China:

A) Necessity of the Chinese Partner and difficulty of Due Diligence

B) Other motives to establish a Joint Venture in China. Different business culture and different business goals.

The level of foreign control in Sino-Foreign Joint Ventures:

A) Limitation of risks through contractual precautions

B) Limitation of risks by limiting the Chinese management control

PRC Joint Ventures Legal Framework

Cooperative Joint Venture (CJV):

A) Cooperative Joint Venture without Chinese legal person status

B) The Agreement and Contract of CJV

C) Investment, Capital Contributions and Registered Capital of CJV

D) Purchase of Materials and Marketing of Products

E) Profits and losses of CJV. Recovery of Investment and Distribution of Income

F) Management of CJV. Board of Directors, Joint Management Committee and General Manager

G) Duration, Dissolution and Liquidation of CJV

Equity Joint Venture (EJV):

A) The Agreement and Contract of EJV

B) Investment, Capital Contributions and Registered Capital of EJV

C) Board of Directors and Management Office

D) Introduction of Technology

E) Right to the Use of Site and Its Fee

F) Purchasing and Selling

G) Duration, Dissolution and Liquidation of EJV

Differences between EJV and CJV

Taxation of Joint Ventures:

A) Taxes

B) Financial Affairs and Accounting 

C) Foreign Exchange Control

D) Off-shore Joint Ventures

Staff, Workers and Trade Unions in Sino-Foreign Joint Ventures Settlement of Disputes in Sino Foreign Joint Ventures

Introduction

From a historical and political point of view, Sino-Foreign Joint Ventures represent the essence of relations between China and the world as well as the main business and corporate strategy responsible of the extraordinary economic growth and success of Chinese enterprises, which started with the “Chinese economic reform” and the great opening of the Asian giant to the world.

As is known, the Chinese economic reform refers to the program of economic reforms known also as “Socialism with Chinese characteristics” in the People’s Republic of China that was started in December 1978 by reformists within the Communist Party of China, led by Deng Xiaoping.

Economic reforms have introduced market principles and were carried out in two stages. The first stage, in the late 1970s and early 1980s, involved the decollectivization of agriculture, the opening up of the country to foreign investments, and permission for entrepreneurs to start businesses, even if the main industries remained state-owned.

The second stage of reform, in the late 1980s and 1990s, involved the privatization and contracting out of much state-owned industry and the lifting of price controls, protectionist policies, and regulations, although state monopolies in sectors such as banking and petroleum remained.

In this very long-term plan, by starting from zero, China had to restructure and modernize all the sectors of industry, state-owned enterprises, management of public companies and introducing in the legal system private domestic companies, change corporate culture, choose what manufacturing, import and export (just to mention few things to do).

Consequentially, China needed to make accessible its immense land to foreign investments and let in the most advanced and efficient foreign enterprises in order to acquire the necessary knowledge to achieve the ambitious goals of its reform (…The State shall encourage the establishment of export-oriented or technologically advanced production-type co-operative enterprises…).

Ironically, among those necessary foreign investors to increase quality and standards, especially in the heavy and high-tech industry, there were China’s “best” enemies, USA and Japan.

So, if the underlying directive was learning “what and how to do” from its enemies-future business partners-competitors, it was necessary for China finding an investment vehicle that would have allowed foreigners and Chinese working together under the strict control of the government.

China wanted to “learn” quickly and therefore it started to attract foreign enterprises/investments by offering low labor and production costs, and by making the vast domestic market just a honey trap because rapidly filled in by Chinese products and services, and then, in few decades, starting to export its products and conquer the international markets (…The State encourages cooperative joint ventures to sell their products on international markets…).     

As result, an obligatory equity joint venture with a Chinese state-owned company as partner was the first and only investment vehicle available for foreign investors to operate in China. 

The introduction of joint ventures marks a turning point for China, especially if we consider/remember that prior to 1979, the legal system of China did not provide any mechanism for foreign investment, and the 1978 Constitution seemed expressly to preclude such foreign investment insofar as it described the PRC as “a socialist state of the dictatorship of the proletariat” in which the means of production were under “socialist ownership by the whole people and socialist collective ownership by the working people.”

This situation radically changed July 1, 1979, when the Fifth National People’s Congress adopted the “Law of the People’s Republic of China on Joint Ventures Using Chinese and Foreign Investment” (JV Law), and additionally, in 1982, when the Chinese government amended the Chinese Constitution in order to provide explicit constitutional protection to foreign direct investment in general, and equity joint venture investment in particular.

But to be welcomed, these equity joint ventures established within China’s territory had to and yet “must be able to promote the development of China’s economy and the improvement of the science and technology for the benefit of socialist modernization.”

Nowadays, China allows foreigners to establish two types of joint ventures, “equity joint venture” and “cooperative joint ventures”, and in those businesses qualified as restricted, an obligatory joint venture with a Chinese partner (usually a state-owned enterprise) is still the only investment vehicle available for foreign investors.

However, the original scenario of joint ventures in China has changed substantially over the years. For example, many businesses that at the beginning of the great opening could enjoy tax incentives or full tax exemptions because they were considered innovative or fundamental to China’s growth, have now lost those benefits. Materials and production costs, salaries and wages have increased considerably. During the years, new investment vehicles have been made available to foreign investors. Many foreign enterprises have suffered great losses due to the Chinese partner or simply did not make the planned profits, always because of the Chinese partner.

Thus, if the initial reasons for foreign investors to venture with a Chinese partner were basically the compulsoriness of the law, “tempting” low labor and production costs, tax incentives and friendly tax policies, and the “mirage” of a boundless market, it is important to understand, nowadays, that these reasons are disappearing and foreign enterprises have more safe alternatives, if a joint venture is still a useful and profitable vehicle to operate in China.

Motives to establish a joint venture in China

A) Necessity of the Chinese Partner and difficulty of Due Diligence

On the Chinese side, transfer of technology, better management skills and techniques (without forgetting marketing and advertising strategies) are still the same valid reasons to form a joint venture with a foreign partner, whilst finding the right motives for foreigners requires a deeper analysis.

The labor and production costs as well as taxation and tax treatment are not “very” convenient as in the past, and markets and consumers can be reached through other strategies and business entities. In addition, joint venture is still the vehicle that most exposes investors to the risk of losing their know-how and investment.

Therefore, one of the first element to take into consideration to assess if a joint venture is the “only” and “right path” for a foreign company in China, it is the analysis and valuation of the “necessary presence” of a Chinese partner, which is the crucial element that characterizes this type of investment vehicle.

In a joint venture, investors need to take into account that having a partner means partner’s interference/power in company decisions and management.

Usually the advantage of having Chinese partners is the support they can provide to foreign companies unfamiliar with doing business in China. Such support may include obtaining government approvals, labor recruitment, sourcing raw materials, acquiring land and production facilities, and obtaining access to marketing and distribution channels.

But if a foreign company has enough resources and experience, may get the same things through a wholly foreign-owned enterprise. In fact, an experienced Chinese staff in a WFOE may offer a similar range of support to a foreign investor as a Chinese partner in a JV.

The problem arises when domestic sales are the main priority since Chinese individuals may not guarantee the same level of support of a Chinese company as partner.

In fact, regarding to domestic sales, a Chinese company already operating is supposed to share (guarantee) its existing and established marketing and distributions channels. In this way, the upfront investment risks of the foreign investor are greatly reduced, particularly in all those business-to-business transactions which are based on personal relationships that take time to be developed.

Unfortunately, uncountable foreign investors have been greatly disappointed when they realized later (too late) that the distribution channels and all the contacts and connections introduced and shared by their Chinese joint venture partners turn out to have been exaggerated or/and inefficient or inexistent.

Thus, it is clear that if a Chinese partner is deemed necessary, like in the case of domestic sales, then foreign investors should conduct prior serious due diligence investigations on their “necessary” Chinese partner.

The due diligence activities should not be finalized to ascertain only the reliability of partner and its real business capabilities, but they should be extended to all subjects involved in the business, by accurate investigative activities on the most disparate areas and matters.

However, collecting accurate information is an hard task in China. The most common problems encountered during due diligence investigations are poor transparency and inadequate documentation. For example, many Chinese companies keep two sets of books or maintain poor accounting records. They have a high volume of off-book sales, failing to make a distinction between corporate and personal funds. Usually their accounting records lack of an understanding of basic accounting principles, and they are not able to provide a satisfactory estimate of production capacity.

Another difficult task for foreign investors is that of discovering all the liabilities or any other lack of compliance with regulations that can be easily hidden by Chinese companies. Investors must be sure that the Chinese partner has the ownership of its asset, and that the partner is not hiding financial burdens such as loans, debts and bad inventories.

Sometimes Chinese companies hide complicated debts and security arrangements which involve a tangled web of connections with affiliated companies. There are often human resource issues such as unpaid social security, employee income taxes, labor contract clauses and labor disputes.

It is thus very important to closely coordinate the various due diligence teams to ensure that any suspicious discoveries are properly followed up, in order to avoid expensive mistakes.

Lastly, and in addition to due diligence and investigations on legal, financial and commercial aspects, it is highly recommended to perform interviews with suppliers, customers and even competitors in order to be sure about partner’s trustworthiness, reliability and reputation.

B) Other motives to establish a joint venture in China. Different business culture and different business goals

There are other reasons that lead foreign companies to choose joint ventures as investment vehicle to operate in China, and usually a joint venture is part of a complex global business and corporate strategy.

One of the most common of these cases is when the foreign company is only interested in manufacturing or assembling some components and/or parts enjoying a faster work and cheaper production costs.

Another reason may be the flexible nature of joint venture which allows to limit the risks in volatile emerging markets. Sometimes, in fact, companies would try to lunch new products and create its related market, or would engage in a touch-and-go business, but do not want to (or they cannot) afford expensive failures.

A cooperative joint venture can also be an attractive investment vehicle for foreigners who want a fast return of investment by gradually transfer control to their Chinese partners. In this case, the foreign company sells its know-how and IP asset to its partner starting from a dominant controlling position until it leaves the JV or remains as minority shareholder.

Cooperative joint ventures which operate without a separate legal person status may also be an interesting vehicle because certain taxes and fees can be avoided. For example, this type of CJV does not have to pay taxes on the transfer of title to the land from the Chinese partner to the CJV, or pay fees for the purchase by the Chinese partner of title to the land in cases where the Chinese partner’s title to the land is unclear.

Recently JVs are also used by foreign investors who prefer their Chinese partners to receive fixed payments only. In this case, the Chinese partner remains a silent minority shareholder and its participation is limited to the rent of business licenses and assets to the foreign company.

Whatever the reason of a joint venture, it is important to be sure that the goals and ways to achieve them coincide with those of the Chinese partner. In fact, many joint ventures in China fail because the different business philosophies, expectations and practices of the partners.

Sometimes, when foreign investors are trying to build a base in China, and are willing to forego profits to build market share or reinvest profits into the venture, the Chinese partners are, on the contrary, looking for quick cash to finance their own expansion or pay off debts, as well as an outlet to dump excess workers. But sometimes it is the Chinese partner that tries to place a new product or service and build its related market for a long-term business, whilst the foreign partner is in rush to “make money” and leave China soon with its cheap manufactured product.

It is easy to understand that when interests differ, conflict over strategies and management can arise frequently, and often, the communication problems or gap between the foreign and Chinese partners are due to the different direction and scope that the partners are giving to the joint venture.

Foreign investors “must be aware” of these cultural and business differences, since starting the negotiation phase, and make sure what precisely their Chinese partners mean to do and how to do. Once the foreign partner is sure of the “real” Chinese partner’s motives, it should bind them in a unequivocal way in the joint venture contract. 

The level of foreign control in Sino-Foreign Joint Ventures:

A) Limitation of risks through contractual precautions

Joint Ventures in China are notoriously difficult to manage successfully, and the foreign investor’s level of control is a complicated and hard task.

However, if it is true that the anthology of sino-joint ventures is rich of cases of failure due to the disloyalty of Chinese partners, it is also true that nowadays foreign companies can avoid all the mistakes made during the years, and take the necessary and effective precautions before engaging in a joint venture with a Chinese partner.

First of all, it is important to always keep in mind that a joint venture, not only a sino-foreign joint venture, is an investment vehicle which by its nature carries the danger of turning a partner into a competitor.

This intrinsic problem/characteristic is more accentuated in China, especially for some types of businesses and for some companies from specific foreign countries (the stars and stripes eagle has been heavily injured many times by the red dragon), and unfortunately it is true that Chinese motives are usually more competitive than collaborative. 

It is already been said that the motives that lead Chinese companies to form a joint venture with a foreign partner are approximately the same as always. Chinese partners gain, in addition to the profits generated by the joint venture, technology, know-how and new products or processes, and for Chinese, it is almost natural, after having learned how to do something, get rid of the foreign partner.

However, foreign companies may drastically reduce or prevent risks if they turn all the necessary precautions into binding contractual rules.

A first important precaution is checking the “real and concrete” meaning of the Chinese version of main joint venture’s documents such as the agreement, articles of association and contract.

More precisely, the law allows foreign partners of a CJV to accompany a foreign language version of the said documents, and in a EJV the foreign language version has formally the same value of the Chinese language. In case of conflicting contents between the different versions of the documents, the examination and approval authority demands an amendment to them to correct the conflicting contents.

However, even though the law seems to recognize equal validity to foreign languages, the Chinese courts and judges will always give more weight, because they have to, to the Chinese version. For this reason, it is highly recommended, after the negotiation phase has been concluded, and parties have drafted the main documents, before to submit them to examination and approval authority, check the real and practical meaning of the Chinese version, and eventually re-write the foreign versions as exact translation of the Chinese versions in order to be sure of their effective equal validity in front of a court.

Another critical point is the careful and clear definition of the joint venture’s products and markets. This definition must be reinforced by a non-compete agreement during and after expiration of the joint venture. During the joint venture, the foreign party should constantly control that the Chinese partner is respecting the non-compete commitments, and in case of violations, take all the necessary actions promptly.

The joint ventures established for developing and manufacturing technology, which imply the technology transfer from the foreign investor to the joint venture, are those that most expose investors to the risk of being “betrayed” by the Chinese partner.

But also in this case, foreign companies have developed excellent operating strategies and contractual rules that effectively limit or eliminate the risk of losing know-how and IP asset.

The most common, practical and effective strategy is that of segmenting and distinguishing the technology and all its different components in order to not expose the complete core technology. In fact, the biggest foreign companies usually break up the critical core technology into different parts or materials produced elsewhere which are sold or supplied to the joint venture by the foreign party and sometimes just assembled by the joint venture.

It is also very important to extend some duties and obligations, such as confidentiality and non-compete agreements, and the related contractual liabilities in case of violations, to all the subjects involved in the tech-based joint venture, such as employees, Chinese partners, consultants and designers, subcontractors etc.   

The joint venture should be expressly prevented from disclosing the technology to the Chinese partner or other subjects without approval, and the foreign party should create and monitor detailed custodial and copy-tracking measures.

Another important action to take before to invest in a JV in China, is the registration of patent(s) and/or trademark(s).

Most of foreign investors make the big mistake to wait that the planning and negotiations phases are finalized to register their patents or trademarks in China.

Unfortunately, this naive oversight gives to the Chinese partner the opportunity to register as first and as owner/original user the foreign intellectual properties such as company and product brand names, or simply to copy the products to then register the same products with a different name and as original ones. 

Therefore, and because China is a strict first-to-file jurisdiction, trademarks and patents must be registered before anyone else can do so in order to enjoy exclusive use rights of the marks and patents.

Lastly, as a matter of contract, foreign investors should retain ownership over improvements and the technology transfer contract should end at the same time as the joint venture agreement. 

B) Limitation of risks by limiting the Chinese management control   

Statistically speaking, the success of a joint venture in China depends on the exclusion of the Chinese partner from the management and decision power. 

Foreign investors make the big mistake to implement the common Western management and control models, thinking that in China, the 51% of ownership grants them the full control of the joint venture.

Usually, the foreign side put all its efforts in negotiating the majority of the ownership interest, because in this way it is entitled to elect the entire board of directors, and through the board control the joint venture.

In order to obtain this majority, foreign investors try to balance the control power with management structures and functions which ensure to the Chinese partner its power over the daily operations. For example, the foreign investor allows the Chinese partner to appoint the representative director and the general manager and deal with the daily operations since “they are Chinese and they can speak Chinese”.

But in a joint venture in China, the party that manages the daily operations has de facto the control over all the joint venture, and the general manager and legal representative become the key figures.

Therefore, if in a joint venture in China, the traditional management and control model based on the majority of seats in the board of directors do not ensure the full control, the foreign partner should focus on excluding or limiting some powers that give the real control of the joint venture.

For instance, the person who controls the registered company seal has the power to act on the behalf of the joint venture company and to deal with the company’s banks and other key service providers, as well as the power to conclude binding contracts for the entire joint venture.

It is also normal that the Chinese staff transferred to the JV will follow only the orders of the Chinese manager(s), remaining loyal to the original goals of the Chinese company/partner.  

The idyllic solution would actually be to have the majority of the board of directors because holding the majority stake, and to have the power to appoint and remove the JV’s legal representative and general manager.

But Chinese partners will never accept to give the full control to the foreign partner, whilst they will aggressively try to obtain management positions.

The foreign partner may try to use the same trick of Chinese by establishing a CJV operating as a limited liability company, where, in theory, it is possible for a minority investor to have majority control of the board of directors, and keep the power to appoint the legal representative and general manager, but in reality the Chinese would hardly accept it.

If the Chinese partner insists on taking the management positions, the foreign investor then should negotiate clear rules to control the daily business operations and the “Chinese” manager. For example, the representative director and the general manager, should be two different persons and, in case of managers, recruited from the open market with unanimous board approval.

The foreign investor may also negotiate that the posts of legal representative and manager are rotated, and add to the list of decisions that require unanimous board approval, certain important business decisions, giving then the effective publicity of this list to the third parties that daily deal with managers and legal representative such as banks, service providers etc.   

For completeness of analysis, there are cases in which the Chinese partner accepts a minority position but it can still compromise the foreign control of the joint venture through its veto rights for all the matters that require unanimous board approval.

This interference in the decision power may turn into serious problems when the joint venture has to take promptly some crucial decisions due for example to changes in market conditions, including consolidation of multiple JVs in which a foreign investor has an equity interest in order to rationalize and achieve economies of scale, merger, division, dissolution or simply amendment of the constitutional documents.

One method to “try” to solve this problem is converting the JV into a wholly owned subsidiary of an offshore vehicle with the foreign investor and minority Chinese investor holding shares in the offshore vehicle. This conversion would allow the foreign investor to be in full control of the offshore vehicle and consequently of the JV.

Another option, which requires a majority of 67%, is to convert the JV into a Foreign-Invested Company Limited by Shares (FICLS). A FICLS has a different corporate governance structure, and with a majority of 67% shareholding, the foreign investor can acquire effective control of the FICLS highest governing body, the shareholder’s general meeting.

In this way, through the general meeting, the main important decisions can be approved, although this solution is unsuitable when decisions need to be taken promptly since the conversion process requires central MOFCOM approval and thus it takes time to be finalized.

PRC Joint Ventures Legal Framework

The laws and regulations related to sino-foreign joint ventures were the first Chinese legislative measures that allowed foreign enterprises to operate in China.

Over the years, in order to create a favorable investment environment and to encourage overseas firms to invest in China, the Chinese government has gradually set up a relatively complete legal system, specifically to regulate the foreign-invested enterprises (FIEs), by creating a foreign investment policy system, which mainly includes industrial policies, regional policies, tax policies and financial polices.

Therefore, the main laws and regulations that compose the PRC joint ventures legal framework, include:

• Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures (hereinafter referred to as EJV Law);

• Regulations for the Implementation of the Law on Sino-foreign Equity Joint Ventures (hereinafter referred to as Regulations of EJV);

• Law of the People’s Republic of China on Sino-Foreign Co-operative Joint Ventures (hereinafter referred to as CJV Law);

• Detailed Rules for The Implementation of The Law on Sino-Foreign Cooperative Joint Ventures (Detailed Rules of CJV).

The above measures, which specifically and directly regulate joint ventures in China, are integrated by other laws and regulations, which directly apply to or indirectly affect FIEs, such as (but not limited to):   

•   Foreign investment industrial guidance catalogue 2015;

• The Company Law of the People’s Republic of China;

• The Contract Law of the People’s Republic of China;

• The Insurance Law of the People’s Republic of China;

• The Arbitration Law of the People’s Republic of China;

• The Labor Law of the People’s Republic of China;

• The Price Law of the People’s Republic of China;

• The Anti-Monopoly Law of the People’s Republic of China;

• The Enterprise Income Tax Law of the People’s Republic of China;

• The Individual Income Tax Law of the People’s Republic of China.

In addition, it deserves a special mention the China’s Standing Committee of the National People’s Congress resolution (the “2016 NPC Resolution”), which has marked another important milestone in the development of FIEs Investment Administration in China. 

Briefly, the 2016 NPC Resolution has abolished the country’s three-decade-long approval regime for the establishment of foreign-invested enterprises and adopted a much simplified record-filing system.

In fact, in addition to specific laws and regulations, an FIE/JV, regardless of its investment scale, industry and term, was generally required to obtain approvals, primarily from the MOFCOM or its local branches, for its establishment, equity transfer, capital increase or decrease, termination and liquidation, or more general, goes through the several administrations and departmental regulations governing the various foreign investment related issues, such as mergers and dissolutions, foreign exchange, and beneficial tax treatments.

The NPC Resolution and its implementing measures, are the most recent initiatives, which are aimed at relaxing the regulatory framework for foreign investment.

Cooperative Joint Venture (CJV):

A) Cooperative Joint Venture without Chinese legal person status

A Sino-Foreign Cooperative Joint Venture (CJV), also referred to as Contractual Joint Venture, is a joint venture between a Chinese and a foreign company within the territory of China, which is organized by means of a contract rather than equity interest.

According to Article 4 of the Detailed Rules of CJV, a cooperative joint venture may be either a joint venture with the status of a Chinese legal person or without the legal person status.

Thus, there are two types of CJV:

• CJV formed as a Chinese limited liability company. In this case, the CJV acquires the legal status of Chinese legal person and the new legal entity owns all the contributed assets, and the liabilities of the investors are limited to contributions made to the registered capital of the CJV. 

• CJV without legal person status where the partners operate as separated legal entities. In such cases, the contributions remain property of the partners, the income generated becomes the joint property of the partners, and the partners are jointly and severally liable to the extent of their total assets.

More specifically, the Detailed Rules of CJV set special provisions (Chapter IX) to apply to the cooperative joint ventures without legal person status. In this type of CVJ all partners bear joint liability for civil liabilities.

Like a CJV limited liability company, a CJV without legal person status shall register the investment made or cooperation conditions provided by each party at the administrative authority for industry and commerce (AIC).

Always like the CJV limited liability companies, the law grants wide freedom of contract to partners in order to choose the nature and percentage of contributions as well as ownership of the investment made or cooperation conditions provided by parties. In fact, according to the law, investment or cooperation conditions may be jointly owned by all parties, or partly owned by each contributing party and partly owned by all parties.

Assets accumulated from operations of the cooperative joint venture shall belong to all parties, but because in a CJV without legal person status, partners are jointly and severally liable to the extent of their total assets for the debts and liabilities of the CJV, the investment made or cooperation conditions provided by parties to the cooperative joint venture are subject to unified management and utilization by the cooperative venture. Article 52 of the Detailed Rules of CJV expressly states that no party can “take the liberty to take actions on such matters without the consent from other parties.”

In fact, a cooperative joint venture without legal person status has to establish a joint management committee, which consists of representatives of all parties to the cooperative joint venture and it has to manage the cooperative joint venture on behalf of all parties.

The joint management committee is the only body entitled to take decisions on all major issues concerning the cooperative joint venture.

Lastly, and always as special rule due to the lack of separation of the liability, a cooperative joint venture without legal person status has to establish unified account books on the location of the joint venture, and each party to the joint venture has to establish its own account books.

B) The Agreement and Contract of CJV

A CJV is established through a co-operative joint venture contract (therefore it is also called contractual joint venture) and parties can enjoy great flexibility in structuring the joint venture.

In fact, according to the CJV Law, partners are free to set the terms of cooperation and provisions on such items as investment, distribution of earnings or products, sharing of risks and losses, method of business management and the ownership of property on the expiry of the contract term.

The Detailed Rules of CJV make clear the difference between agreement and contract by specifying that the cooperative joint venture agreement refers to a written document produced after all parties reached consensus on the principles and significant matters in relation to the establishment of the cooperative joint venture, whilst the cooperative joint venture contract refers to a written document produced after all parties reached consensus on their respective rights and obligations in the cooperative joint venture.

Always the Detailed Rules of CJV clearly establish that in case of “inconsistent” contents in the agreement and articles of association with the contract of a cooperative joint venture, the contract shall prevail, and if parties agree to sign only the articles of association and contract, the agreement may be omitted.

According to the Article 12 of the Detailed Rules of CJV, the contract of a cooperative joint venture shall bear the following items:

•  names, place of registration, domicile of all parties, and names, titles and nationalities of their legal representatives (where the foreign party is a natural person, his/her name, nationality and domicile);

• name, address and business scope of the cooperative joint venture;

• total amount of investment, registered capital, way and duration of investment or cooperation conditions contributed by each party;

• transfer of investment contribution or provision of cooperation conditions by each party;

• distribution of income or products to all parties, apportioning of risk or loss between the parties;

• composition of the board of directors or the joint management committee, allocation of the members of the board of directors or the joint management committee;

• responsibilities of and the ways for employment and dismissal of the president and other senior management people;

• main production equipment and production technology to be employed, and their sources;

• arrangement for sales of products in and outside China;

• arrangement for the income and expenditure of foreign exchanges of the cooperative joint venture;

• duration, dissolution and liquidation of the cooperative joint venture;

• other obligations of the parties and the responsibilities arising from breach of the contract;

• principles for handling finance, accounting and auditing;

• settlement between and among all parties;

• procedures for amending the cooperative joint venture contract.

The agreement and the contract signed by the legal representatives or representatives authorized by them of all parties to the joint venture have to be submitted to the examination and approval authority by the Chinese party/parties.

The law allows the foreign party to “accompany” the agreement and contract written in Chinese by a version of a foreign language agreed upon by all parties.

The parties are allowed to amend the cooperative contract but only after “consultation” and if they unanimously agree on the changes. In addition, the amendments have to be reported to the examining and approving organ for approval, and if the amendments involve items for official industrial or commercial registration or tax registration, the procedure of registration of the amendments will be conducted with the administration for industry and commerce or the taxation organ.

C) Investment, Capital Contributions and Registered Capital of CJV

In a cooperative joint venture is necessary distinguish the concept of “total amount of investment” from that of “registered capital”.

Article 15 of the Detailed Rules of CJV defines the total amount of investment of a cooperative joint venture as the sum of funds necessary for reaching the production scale provided for by the cooperative joint venture contract and the articles of association of the cooperative joint venture.

The law then defines the registered capital of a cooperative joint venture as the total amount of capital contributed by all parties to the cooperative joint venture and registered with the AIC when applying for the establishment of the cooperative joint venture.

Investment or terms for cooperation by Chinese and foreign partners may be in the form of cash, kind, land-use rights, industrial property rights, non-patented technology and other property rights.

There is no minimum foreign contribution required to establish a cooperative joint venture and the registered capital can be either denominated in Renminbi Yuan or in any other freely convertible foreign currency as agreed upon by all parties to the cooperative joint venture.

Any decrease in the registered capital of the cooperative joint venture is not allowed during the term of cooperation. However, any decrease necessary due to changes in the total amount of investment and production scale, is subject to the approval of the examination and approval authority.

For a cooperative joint venture, which has obtained the status of a Chinese legal person, the investment made by the foreign party shall be no less than 25% of the registered capital of the venture.

For a cooperative joint venture without the status of a legal person, the specific requirements for the investment made and cooperation conditions contributed by all parties to the venture are subject to the regulations stipulated by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC).

The investment made or cooperation conditions provided has not be property or property rights already posted as mortgage or other forms of collateral. Where the investment or cooperation conditions provided by the Chinese party fall into the category of State assets, the law requires an asset evaluation.

In the event of a failure to make the investment or provide the cooperative conditions as set forth by the cooperative joint venture contract, the AIC will specify a time limit to fulfill the obligation. If the obligations are still not performed upon the expiration of the specified time limit, the examination and approval authority revokes the certificate of approval and the AIC revokes the business license of the cooperative joint venture and makes a public announcement to that effect.

All parties to a cooperative joint venture have to stipulate, based on the production and operation requirements of the venture, the duration of the investment to be made and the cooperation conditions to be contributed in the joint venture contract.

The party failing to make investment or provide cooperation conditions as set forth by the cooperative joint venture contract will be held liable for the breach of contract to the other party that has performed its duties as stipulated in the contract.

The investments made or cooperation conditions contributed by all parties to the cooperative joint venture is subject to verification, and reports of verification have to be submitted by accountants registered in China.

The certificate of contribution includes the following items:

• name of the cooperative join venture;

• date of the establishment of the cooperative joint venture;

• names of all parties to the cooperative joint venture;

• contents of the investments made or the cooperation conditions contributed by all parties to the cooperative joint venture;

• date of contribution of investments or provision of operation conditions by all parties to a cooperative joint venture;

• serial number and date of issuance of the certificate of contribution.

Copies of the certificate of contribution have to be submitted respectively to the examination and approval authority and the AIC.

The rights inherent to contributions may be transferred by a party to another party of the joint venture entirely or partially, or may be transferred by a party of a joint venture to a third party entirely or partially, provided that there is the consensus expressed in written form of the subject to whom the rights are transferred, and the transfer has been approved by the examination and approval authority.

The examination and approval authority will decide to approve or disapprove the assignment within 30 days of receipt of the relevant documents.

D) Purchase of Materials and Marketing of Products

A cooperative joint venture can work out production and operation plans on its own, based on the approved business scope and scale of production and operation.

However, a cooperative joint venture is allowed to purchase either within the territory of China or from foreign countries machines and equipment, raw materials, fuels, parts and components, accessories, transportation tools and office articles, etc.

Cooperative joint ventures which intend to import and/or export products have to apply for import or export licenses and quotas for products subject to licensing and quota administration.

Cooperative joint ventures may directly sell their products on international markets or entrust overseas distributors or Chinese foreign trade companies to sell their products by proxy or on commission.

The price of products can be freely decided by the joint venture, and products have to be sold in accordance with the sales methods and provisions described in the approved contract of the venture.

However the law sets some limits by fixing that the export products cannot be sold at “prices ostensibly lower than reasonable prices of products of the like on international markets” or import materials at “prices higher than those of products of the like on the international markets”.

Machines and equipment, parts and components as well as other materials imported by the foreign party as investment in kind and machines and equipment, parts and components and other materials needed in production and operation, which are imported by the cooperative joint venture with funds of the total investment, are exempt from import tariffs and turnover tax in the import links.

The imported materials which are exempt from tariffs and tax and resold within the territory of China or put into domestic commercial channel upon approval, are subject to tariffs and tax or overdue tariffs. 

E) Profits and losses of CJV. Recovery of Investment and Distribution of Income

Profits and losses in a cooperative venture are divided according to the terms of the cooperative venture contract rather than by investment share, allowing a more flexible schedule for return on investment and investment risk in cases where one investor provides cash while the other party’s investment is primarily in kind.

In fact, the Detailed Rules of CJV expressly allow parties to distribute income through profit-sharing or other forms as agreed upon by both parties, and distribute income or products and bear the responsibility for risks or losses in accordance with the provisions they have stipulated in the joint venture contract.

In addition, the Chinese and foreign partners may agree in the joint venture contract that, on the expiry of the duration of the term of cooperation, all the fixed assets of the joint venture will be returned gratis to the Chinese partner, and the methods to allow the foreign partner to recover its investment within the term of cooperation.

If parties agreed to transfer the fixed assets of the venture on the expiration of the cooperation to the Chinese party on a gratuitous basis, the foreign party may apply, within the term of the cooperation, for an early recovery of its investment in the following ways:

• on the basis of distribution according to the contribution of investment or cooperation conditions, agreement shall be reached in the contract of the cooperative joint venture to increase the proportion of profit sharing to the foreign party;

• upon examination and approval by the finance and taxation authorities according to State provisions on taxation, the foreign party may first recover its investment before income tax payment is made by the cooperative joint venture;

• other means of investment recovery approved by the finance and taxation authorities and the examination and approval authority.

For a cooperative joint venture that allows the foreign party to first recover the investment, the Chinese and foreign parties have to share the liabilities of the cooperative joint venture in light of relevant legal provisions and agreements in the joint venture contract.

When the foreign party of the venture applies for an early recovery of investment on the basis of distribution according to the contribution of investment or cooperation conditions, or upon examination and approval before income tax payment is made by the cooperative joint venture, the party has to specifically explain the amount of the investment and the time and ways it would like to first recover such investment. If there are losses, the foreign party cannot recover its investment unless the losses of the cooperative joint venture are recovered.

Dividends, funds distributed by the joint venture at the termination, and any other legal income, may be remitted abroad by the foreign partner provided that it has fulfilled all obligations as prescribed in the laws and regulations and the stipulations of the joint venture contract.

The income in form of wages or other legal earnings of employees of foreign nationality of the joint venture may be remitted abroad after the payment of individual income tax.

F) Management of CJV. Board of Directors, Joint Management Committee and General Manager

According to Detailed Rules of CJV, cooperatives joint ventures have to establish a board of directors or a joint management committee.

The board of directors or the joint management committee is the highest decision-making organ on the major important issues concerning the cooperative joint venture, and in the articles of association, parties have to lay down provisions governing the two organs such as: 

• composition, terms of reference and proceedings of the board of directors or joint management committee of the cooperative joint venture;

• term of office for directors of the board of directors or members of the joint management committee;

• terms of reference of chairman and vice chairmen of the board of directors or director and deputy directors of the joint management committee;

• decision making process and voting procedures of the board of directors or the joint management committee;

• other rules of the board of directors or the joint management committee which are not stipulated in the Detailed Rules of the CJV;

• establishment, terms of reference and rules for handling matters of the operation and management body;

• terms of reference, engagement and dismissal of general manager and other senior management personnel.

In general the articles of association of a cooperative joint venture is a written document, in which, as primary source, partners lay down the principles of organization and method of operation and management as agreed on by all parties in line with the cooperative joint venture contract. Where there are any contents in the agreement and articles of association, which are inconsistent with the contract of a cooperative joint venture, the contract shall prevail.

However, the Detailed Rules of CJV provide some rules related to the main functions and issues of the two corporate bodies, which are also limits to the autonomy of the parties in the articles of association.

For a CJV operating without a separate legal person status, as already mentioned it, the law prescribes the establishment of a joint management committee instead of the board of directors, which is the only body entitled to take decisions on all major issues concerning the cooperative joint venture.

The board of directors or the joint management committee has to consist of at least three persons.

The allocation of members is, through consultations between the Chinese party and the foreign party, decided with reference to the proportion of the investments or cooperation conditions contributed by each party.

Directors of the board of directors or members of the joint management committee are appointed or replaced by all parties themselves.

The selection of chairman and vice chairmen of the board of directors, or director and deputy directors of the joint management committee, has to be indicated in the articles of association of the cooperative joint venture.

However, where the position of chairman of the board of directors or director of the joint management committee is assumed by a nominee of the Chinese party or the foreign party, the position/positions of vice chairman/chairmen or deputy director/directors are assumed by a nominee of the other party.

The tenure of directors and members on the joint management committee is decided by articles of association of the cooperative joint venture, with each tenure no longer than three years. Upon expiration of each tenure, directors and members may renew their tenure if reappointed by the appointing party.

Directors of the board or members of the joint management committee have to meet at least once a year, with the meeting convened and presided over by the chairman of the board or director of the committee.

Where the chairman of the board or the director of the committee is unable to perform his/her duties out of special reasons, he/she may appoint a vice chairman of the board, deputy director of the committee, other directors or members to convene and preside over such meetings.

Meetings of the board or committee may be convened on proposals made by more that one third of the total number of directors or members, and the meetings of the board or committee can only be convened with the presence of more than two thirds of directors or members. All directors or members shall be notified of the board or the committee meetings 10 days prior to their convocation.

Directors or members who neither participate in the meetings nor entrust others to participate on their behalf without any “reasonable” excuse are regarded as having participated in the meetings of the board or the committee and having lodged abstention votes.

Directors or members unable to participate in such meetings can entrust, in written form, others to participate in such meetings and lodge votes on their behalf.

As general rule, the decisions taken at the board or the committee meetings, to be legally valid and binding for the joint venture and the parties of the joint venture, have to be adopted with the consents of more than half of the directors or members, and the decisions may also be made by the board or the committee through correspondence.

But the law requires the unanimous consent of all the directors or members participating in the meetings of the board or the committee for the decisions concerning the following items:

• amendment to the articles of association of the cooperative joint venture;

• increase or reduction of the registered capital of the cooperative joint venture;

• dissolution of the cooperative joint venture;

• mortgage of the assets of the cooperative joint venture;

• merge and split of the cooperative joint venture and change in the form of the organization;

• other matters which may only be decided with unanimous consent at the meetings of the board or the committee as previously agreed upon by parties to the joint venture.

The chairman of the board or the director of the committee is the legal representative of the cooperative joint venture. Where the chairman of the board or the director of the committee is unable to perform his duty out of special reasons, vice chairman of the board, deputy director of the committee, other directors or members are authorized to represent the cooperative joint venture in its external relations.

The board of directors or the joint management committee is in charge of engaging and dismissing one general manager who will be responsible for the routine and management operations of the joint venture and accountable to the board of directors or the joint management committee.

The role of general manager and other senior managers may be assumed by Chinese or foreign citizens, and by directors of the board or members of the joint management committee.

The general manager or other senior managers who are incompetent or found to have actions of malpractice or serious negligence of duty may be dismissed as decided by the board of directors or the joint management committee, and those who cause losses to the cooperative joint venture will be held liable for the losses.

A cooperative joint venture, only after its establishment, is allowed to entrust business and management operations to a third party external to the joint venture, but only if there is the unanimous consent of the board of directors or the joint management committee.

In addition, in order to delegate business and management operations to a third party, it is mandatory a contract of trusteeship in which clearly are indicated the business and management operations that the trustee is entitled to take.

The cooperative joint venture have then to submit documents such as the resolution of the board of directors or the joint management committee, the contract of trusteeship that has been signed and the financial credit documents of the trustee, to the examination and approval authority for approval. The examination and approval authority shall decide to approve or disapprove within 30 days upon receipt of the documents.

G) Duration, Dissolution and Liquidation of CJV

The law does not set any time limit on the duration of a cooperative joint venture, and therefore parties are free to stipulate a term which has to be indicated in the joint venture contract.

However, if the Chinese and foreign partners agree to extend the term of cooperation, they have to apply to the examining and approving authority 180 days before the expiry of the term of cooperation.

The examining and approving organ will decide whether or not to approve the application within 30 days of receipt.

The application for an extension of the duration of the joint venture is a slightly complex procedure because the parties have to submit to the examination and approval authority, all the due explanations on the execution of the contract establishing the cooperative joint venture, reason(s) for the extension, agreement on rights and obligations and other matters of each party in the extended period.

Upon approval of the extension of duration, the cooperative joint venture will go through formalities for the alteration of registration with the AIC, and the extended duration starts from the first day after the expiration of the original term of cooperation.

The duration for a cooperative joint venture cannot be extended if the joint venture contract has allowed the foreign party to early recover its investment and such investment has been fully recovered. However, if the foreign party agrees to increase the investment, the joint venture can apply an application for extension of the term of cooperation.

A cooperative joint venture shall be dissolved in one of the following situations:

• termination of duration;

• inability to continue operations due to “have” financial losses of the cooperative joint venture or heavy losses caused by force majeure;

• inability to continue operations due to the failure of one or several parties to fulfill the obligations as stipulated in the contract and articles of association;

• occurrence of other reasons for dissolution stipulated in the contract and articles of association;

• revocation made by authorities according to law due to violation of laws and administrative regulations.

In the second and fourth cases, the decision to dissolve the joint venture is competence of the board of directors or joint management committee, which, after having verified the occurrence of the causes that make the cooperation impossible to continue, have to submit their decision to the examination and approval authority for approval.

In the third case, the party or parties failing to fulfill obligations as stipulated in the contract and articles of association will be held liable to losses thus occurred to party or parties fulfilling the stipulated obligations. The party or parties that have fulfilled their obligations have the rights to apply to examination and approval authority for the dissolution of the cooperative joint venture.

The liquidation procedures of a cooperative joint venture shall be handled according to relevant Chinese laws, administrative regulations and stipulations in the joint venture contract and articles of association.

On the expiry or premature termination of the term of the cooperative enterprise, assets, claims and debts shall be liquidated in accordance with legal procedures.

Chinese and foreign partners shall determine ownership of cooperative enterprise property in accordance with the stipulations of the cooperative joint venture contract.

On the expiry or premature termination of the term, the procedures for the cancellation of registration of the cooperative joint venture will be carried out with the administration for industry and commerce and the taxation organ.

Equity Joint Venture (EJV):

A) The Agreement and Contract of EJV

Like the cooperatives joint ventures, the legislator makes clear the difference between the agreement and contract of a equity joint venture, by defining the joint venture agreement as “a document agreed upon by the parties to the joint venture on some main points and principles governing the establishment of a joint venture”, and the joint venture contract as “a document agreed upon and concluded by the parties to the joint venture on their rights and obligations”.

Always like the CJVs, in case of conflicts between the agreement and contract, the contract prevails, and if the parties to the joint venture agree to sign only a contract and articles of association, the agreement may be omitted.

The joint venture contract have to include the following items:

• the names, the countries of registration, the legal addresses of parties to the joint venture, and the names, professions and nationalities of the legal representatives;

• name of the joint venture, its legal address, purpose and the scope and scale of business;

• total amount of investment and registered capital of the joint venture, investment contributed by the parties to the joint venture, each party’s investment proportion, forms of investment, the time limit for contributing investment, stipulations concerning incomplete contributions, and assignment of investment;

• the ratio of profit distribution and losses to be borne by each party;

• the composition of the board of directors, the distribution of the number of directors, and the responsibilities, powers and means of employment of the general manager, deputy general manager and other senior management personnel;

• the main production equipment and technology to be adopted and their source of supply;

• the ways and means of purchasing raw materials and selling finished products;

• principles governing the handling of finance, accounting and auditing;

• stipulations concerning labor management, wages, welfare and labor insurance;

• the duration of the joint venture, its dissolution and the procedure for liquidation;

• the liabilities for breach of contract;

• ways and procedures for settling disputes between the parties to the joint venture;

• the language used for the contract and the conditions for putting the contract into effect.

Unlike cooperative joint ventures, where parties may “accompany” the Chinese version of the contract, articles of association and agreement, with a version written in a foreign language agreed by all parties, but without prejudice to the prevalence of the Chinese version on the foreign version, the Regulations of EJV expressly recognize equal validity to the foreign versions of the mentioned documents which may be written simultaneously and agreed by all parties of the joint venture.

In case of conflicting contents between the different versions of the documents, the examination and approval authority shall demand an amendment to it within a limited time.

Parties may add annexes or amendments to the contract of a equity joint venture which have equal validity with the contract itself.

The agreement, contract and articles of association and their amendments come into force after being approved by the examination and approval authority. 

B) Investment, Capital Contributions and Registered Capital of EJV

Unlike the CJVs, an equity joint venture can only take the form of limited liability company, where each party to the joint venture assumes the liability of the joint venture, share profits and losses, within the limits of the capital subscribed by the party.

In an EJV, the total amount of investment (including loans) refers to the sum of capital construction funds and the circulating funds needed for the joint venture’s production scale as stipulated in the contract and the articles of association of the joint venture, whilst, the registered capital is the total capital registered at the registration and administration office for the establishment of the joint venture, which is subscribed by all parties to the joint venture.

The proportion of investment contributed by a foreign partner as its share of the registered capital of an equity joint venture have to be in general no less than 25 per cent.    

Like the CJVs, each party to an equity joint venture may contribute cash, capital goods, industrial property rights, technology and equipment, site-use rights as its investment in the enterprise, provided they meet the requirements and conditions laid down by the Regulations of EJV.

For instance, the technology and equipment contributed as investment by a foreign partner have to be “genuinely” an advanced technology and equipment appropriate to China’s needs (see also let. D Introduction of Technology). If losses occur due to deception resulting from the intentional supply of outdated technology or equipment, the foreign party has to compensate the losses.

The machinery, equipment and other materials contributed by the foreign party have to be those “necessary” for the production of the joint venture. The price of the machinery, equipment and other materials cannot be higher than the current international market price for similar equipment or materials. The machinery, equipment or other materials, industrial property or proprietary technologies contributed by foreign parties as investment are also subject to the examination and approval authority for approval.

The industrial property or proprietary technologies contributed by the foreign party as investment has to meet one of the following conditions:

• to be capable of improving markedly the performance and quality of existing products and raising productivity;

• to be capable of notable savings in raw materials, fuel or power.

The investment contribution of a Chinese partner may include providing site-use rights for an equity joint venture during its period of operations. If site-use rights are not part of the Chinese partner’s investment contribution, the equity joint venture shall be required to pay site-use fees to the Chinese government.

Each party to a joint venture may contribute cash or buildings, factory premises, machinery, equipment or other materials, industrial property, proprietary technologies, or site use rights as investment. If the investment is in the form of buildings, factory premises, machinery, equipment or other materials, industrial property or proprietary technologies, the value has to be assessed through consultation by the parties to the joint venture on the basis of fairness and reasonableness, or to be assessed by a third party agreed upon by parties to the joint venture.

The registered capital may be expressed in Renminbi, or in a foreign currency agreed upon by the parties to the joint venture.

The foreign exchange contributed by the foreign party has to be converted into Renminbi according to the standard exchange rate announced by the People’s Bank of China on the day of its submission or be cross exchanged into a predetermined foreign currency. Where the cash Renminbi contributed by the Chinese party is converted into foreign currency, it has to be converted according to the standard exchange rate announced by the People’s Bank of China on the day of the submission of the funds.

As general rule, an equity joint venture cannot reduce its registered capital during the term of the joint venture. Only in case of real needs due to changes in the total amount of investment, the scale of production and operation or other circumstances, the joint venture can apply to the examination and approval authority in order to obtain the reduction of its registered capital.

Any increase or reduction of the registered capital of a joint venture has to be approved by a meeting of the board of directors and submitted to the examination and approval authority for approval.

The parties of the joint venture have to pay in full the investment subscribed according to the time limit stipulated in the contract. Delay in payment or partial delay in payment is subject to a payment of interest in arrears or a compensation for the loss as defined in the contract.

After the investment is paid up by the parties to the joint venture, a Chinese registered accountant has to verify it and provide a certificate of verification, based on which the joint venture shall issue an investment certificate.

An investment certificate includes the following items:

•  name of the joint venture;

• date, month and year of the establishment of the joint venture;

• names of the parties and the investment contributed;

• date, month and year of the contribution of the investment;

• date, month and year of issuance of the investment certificate.

Like the CJVs, the parties of an equity joint ventures can assign all or part of their investment subscribed to a third party, provided that there is the consent of the other parties of the joint venture, and that the party who intends transfer the rights has given “purchase priority right” to the other parties of the joint venture, by offering the same conditions to the other parties and the third party.

Lastly, in order to legally finalize the transfer of rights from a party of the joint venture to a third party, the transfer has to be approved by the examination and approval authority. 

C) Board of Directors and Management Office

The highest authority of an equity joint venture is the board of directors, which is the only organ entitled to decide all major issues concerning the joint venture.

According to Regulations of EJV, the minimum number of members of the board of directors is three, and the distribution of the number of directors is ascertained through consultation by the parties to the joint venture with reference to the proportion of investment contributed.

The term of office for the directors is four years, and it may be renewed with the consent of the parties to the joint venture.

The board of directors shall convene at least once every year. The meeting shall be called and presided over by the chairperson of the board. Where the chairperson is unable to call the meeting, he/she has to authorize the vice-chairperson or other director to call and preside over the meeting. The chairperson may convene an interim meeting based on a proposal made by more than one-third of the directors.

A board meeting requires a quorum of over two-thirds (2/3) of the directors. Where the director is unable to attend, he/she has to present a proxy authorizing someone else to represent him/her and vote for him/her. A board meeting shall generally be held at the location of the joint venture’s legal address.

Decisions on the following matters can be made only after being unanimously agreed upon by the directors present at the board meeting:

• amendment of the articles of association of the joint venture;

• termination and dissolution of the joint venture;

• increase or reduction of the registered capital of the joint venture;

• merger or division of the joint venture.

Decisions on other matters may be made according to the rules of procedure stipulated in the articles of association.

The chairperson of the board is the legal representative of the joint venture. Where the chairperson is unable to exercise his/her responsibilities, he/she has to authorize the vice-chairperson of the board or other director to represent the joint venture.

The law requires the establishment of a business management office which is responsible for daily business management.

The business management office shall have a general manager and several deputy general managers who shall assist the general manager in his/her work.

The general manager carries out the decisions of the board meeting, organize and be responsible for the daily management of the joint venture. The general manager, within his/her authority empowered by the board, represents the joint venture externally, and has the right to appoint and dismiss his/her subordinates, and exercise other responsibilities and power as authorized by the board within the joint venture.

The general manager and deputy general managers have to be appointed by the board of directors of the joint venture. These positions may be held either by Chinese citizens or foreign citizens.

At the invitation of the board of directors, the chairperson, vice-chairperson or other directors of the board may concurrently be the general manager, deputy general managers or other senior management personnel of the joint venture. In handling major issues, the general manager has to consult with the deputy general managers.

The general manager or deputy general managers cannot hold posts concurrently as general manager or deputy general managers of other economic organizations. They also cannot have any connections with other economic organizations in commercial competition with their own joint venture.

Where the general manager, deputy general managers or other senior management personnel practice favoritism or seriously abuse their power, the board of directors has the power to dismiss them at any time.

Where a joint venture needs to establish branch offices (including sales offices) outside China or in Hong Kong or Macao, it must report to the Ministry of Foreign Trade and Economic Cooperation for approval.

D) Introduction of Technology

The Regulations of EJV define the introduction of technology as “the necessary technology obtained by the joint venture by means of technology transfer from a third party or parties to the joint venture”.

The technology acquired by the joint venture has to be appropriate and advanced and enable the venture’s products to display conspicuous social and economic results domestically or to be competitive on the international market.

The provisions of Article 42 of the Regulations of the EJV, highlight the “ravenous” need of technology demand of the Chinese government and the task of bringing high tech to China assigned to joint venture enterprises.

In fact, article 42, which refer to the provisions of the article 26, establishes that “the right of the joint venture to do business independently shall be maintained when making technology transfer agreements, and relevant documentation shall be provided by the technology exporting party in accordance with the provisions of Article 26 of these Regulations”.

The technology transfer agreements signed by a joint venture have to be submitted for approval to the examination and approval authority.

Technology transfer agreements have to comply with the following stipulations:

• the fees for use of technology have to be fair and reasonable;

• unless otherwise agreed upon by both parties, the technology exporting party cannot put any restrictions on the quantity, price or region of sale of the products that are to be exported by the technology importing party;

• the term for a technology transfer agreement is generally no longer than ten years;

• after the expiry of a technology transfer agreement, the technology importing party shall have the right to use the technology continuously;

• conditions for mutual exchange of information on the improvement of technology by both parties of the technology transfer agreement shall be reciprocal;

• the technology importing party shall have the right to buy the equipment, parts and raw materials needed from sources they deem suitable;

• no unreasonably restrictive clauses prohibited by the Chinese law and regulations shall be included.

E) Right to the Use of Site and Its Fee

Equity joint ventures requiring the use of a site have to file an application with local departments of the municipal (county) government in charge of the land, and obtain the right to use a site only after securing approval and signing a contract.

The use of land has to be carried out according to the principle of efficiency, and in the joint venture contract, the partners have to stipulate in explicit terms:

• the size, location, purpose and contract period and fee for the right to use a site;

• rights and obligations of the parties to a joint venture;

• fines for breach of contract in case of violations of the rights and obligations related to the use of the of site.

If the Chinese party already has the right to the use of site for the joint venture, the Chinese party may use it as part of its investment. The monetary equivalent of this investment should be the same as the site use fee otherwise paid for acquiring such site.

The standard for a site use fee is decided by the government of the province, autonomous region or centrally administered municipality where the joint venture is located according to such factors as the purpose of use, geographic and environmental conditions, expenses for requisition, demolishing and resettlement and the joint venture’s requirements with regard to infrastructure, and shall be filed by the Ministry of Foreign Trade and Economic Cooperation and the state department responsible for land administration.

Joint ventures engaged in agriculture and animal husbandry may, with the consent of the people’s government of the local province, autonomous region or centrally administered municipality, pay a percentage of the joint venture’s business income as site use fees to the local department responsible for land administration.

Projects of a developmental nature in economically undeveloped areas may receive special preferential treatment in respect of site use fees with the consent of the local people's government. The rates for site use fees will not be subject to adjustment in the first five years beginning from the day the land is used.

After that, the interval of adjustment cannot be less than three years according to the development and changes in geographic and environmental conditions. Site use fees as part of the investment by the Chinese party cannot be subject to adjustment during the contract period.

The fee for the right to the use of site obtained has to be paid annually from the day to begin use of the land stipulated in the contract. For the first calendar year, the venture will pay a half-year fee if it has used the land for over six months, but if less than six months, the site use fee will be exempt.

During the contract period, if the rates of site use fees are adjusted, the joint venture has to pay it according to the new rates from the year of adjustment.

F) Purchasing and Selling

In its purchase of required machinery, equipment, raw materials, fuel, parts, means of transport and items for office use, etc., an equity joint venture has the right to decide whether to buy them in China or from abroad.

The amount of materials needed for office and daily operations of the joint venture purchased in China is not subject to restriction.

A joint venture has the right to export its products by itself or entrust sales agencies of the foreign party or Chinese foreign trade corporations with sales on a commission or distribution basis.

Within the scope of operations stipulated in the contract, a joint venture may import machinery, equipment, parts, raw materials and fuel needed for its production, provided that the joint venture makes a plan every year for items for which import licenses are required by state regulations, and applies for them every six months.

For machinery, equipment and other objects that a foreign party has contributed as part of its investment, the foreign party can apply directly for import licenses with documents approved by the examination and approval authority. For materials to be imported exceeding the stipulated scope of the contracts, a separate application for import licenses is required.

A joint venture has the right to export its products by itself, but for those products for which export licenses are required by state regulations, the joint venture has to apply for them every six months on the basis of its annual export plan.

With respect to prices for materials in China and fees charged for services such as water, electricity, gas, heat, transportation of goods, labor, engineering design, consultation, advertisements, joint ventures will be treated equally with other domestic enterprises.

A joint venture and other Chinese economic organizations will, in their economic exchanges, undertake economic responsibilities and settle disputes over contracts in accordance with the relevant laws and the contract concluded between both parties.

A joint venture has to provide statistic data and submit statistic forms in accordance with the Law of the People’s Republic of China on Statistics and other state provisions on the statistics collection in relation to the utilization of foreign investment.

G) Duration, Dissolution and Liquidation of EJV

Like for CJVs, the law does not set any time limit on the duration of an equity joint venture, and therefore parties are free to stipulate a term which has to be indicated in the joint venture contract.

However, a joint venture may be dissolved in the following situations:

• expiry of duration;

• inability to continue operations due to heavy losses;

• inability to continue operations due to the failure of one of the contracting parties to fulfill the obligations prescribed by the agreement, contract or articles of association;

• inability to continue operations due to heavy losses caused by force majeure soon as natural calamities and wars, etc.;

• inability to obtain the desired objectives of the operation and at the same time to see a future for development;

• occurrence of other reasons for dissolution prescribed by the contract and articles of association.

In the cases number 2, 4, 5 and 6, the board of directors has to submit an application for dissolution to the examination and approval authority for approval.

In the situation described in number 3, the party that performs the contract is entitled to make an application and report it to the examination and approval authority for approval.

Always in the situation described in in number 3, the party which failed to fulfill the obligations prescribed by the agreement, contract and articles of association will be liable for compensation for the losses thus caused.

A joint venture announcing its dissolution must undergo liquidation procedures. The joint venture must form a liquidation committee in accordance with the provisions of the Measures on Liquidation Procedures for Foreign Investment Enterprises.

The liquidation committee is in charge of the liquidation affairs. Members of a liquidation committee are usually selected from among directors of a joint venture.

In case the directors cannot serve or are unsuitable to be members of the liquidation committee, the joint venture may appoint accountants and lawyers registered in China to the committee, and when the examination and approval authority deems it necessary, it may appoint personnel to supervise the process.

The liquidation expenses and remuneration to members of the liquidation committee have to be paid in priority from the existing assets of the joint venture.

The tasks of the liquidation committee are:

• to conduct a thorough check of the property, of the joint venture concerned, its creditors' rights and liabilities;

• to work out the statement of assets and liabilities and a list of property;

• to put forward a basis on which property is to be evaluated and calculated;

• to formulate a liquidation plan.

All these tasks shall be carried out upon approval of the board of directors.

During the process of liquidation, the liquidation committee represents the joint venture concerned in litigation, and the joint venture is liable to its debts with all of its assets.

The remaining property after the clearance of debts can be distributed among parties to the joint venture according to the proportion of each party’s investment unless otherwise provided by agreement, contract and articles of association of the joint venture.

At the time when a joint venture is being dissolved, its net assets or the residual amount of the remaining property subtracting the not distributed profits, various funds and liquidation expenses, that exceeds the actually paid up capital shall be regarded as income derived from liquidation, and income tax shall be levied according to law.

On completion of the liquidation of a dissolved joint venture, the liquidation committee has submit a liquidation report approved by the meeting of the board of directors to the original examination and approval authority, go through formalities for canceling its registration and hand in its business license to the original registration authority.

After dissolution of the joint venture, its account books and documents will be left in the care of the Chinese party.

Differences between EJV and CJV

In both investment vehicles, parties can enjoy a relatively wide contractual autonomy by setting their own rules related to responsibilities, obligations, rights and interests of each partner, whereas the EJV has this division in accordance with the ratio of equity interests, in contrast with CJV where the division is up to the partners will.

Thus, in an EJV each party has to provide cash or permitted contributions in proportion to its subscribed percentage of the EJV’s registered capital.

The limited liability form and the acquisition of Chinese legal person are mandatory for an EJV, whilst a cooperative joint venture may operate without legal person status and the partners are treated as separated legal entities.

The profits and the net assets upon dissolution of the EJV at the expiry of the term of operation, must be distributed strictly in accordance with the parties’ respective percentage shareholding of the registered capital of the EJV.

Unlike cooperative joint ventures, where parties may “accompany” the Chinese version of the contract, articles of association and agreement, with a version written in a foreign language agreed by all parties, but without prejudice to the prevalence of the Chinese version on the foreign version, the Regulations of EJV expressly recognize equal validity to the foreign versions of the mentioned documents which may be written simultaneously and agreed by all parties of the joint venture.

In a CJV, a party may contribute non-cash intangibles in the form of cooperative conditions, where the evaluation of these cooperative conditions is subject to partners’ valuation. In exchange for such cooperative conditions, the party is entitled to participate in the distributable earnings of the CJV.

In a CJV, the technology eventually contributed by the foreign party as its part of investment and capital contribution is not subject to the strict requirements such as those for the EJV.

A CJV could be allowed to negotiate levels of management and financial control, as well as methods of recourse associated with equipment leases and service contracts, whilst in an EJV management control is through allocation of board seats.

In a CJV, foreign partners can often obtain the desired level of control by negotiating management, voting, and staffing rights into the CJV’s articles, since control does not have to be allocated according to equity stakes as in EJVs.

In contrast to EJVs, in a CJV the profit sharing may be in accordance with the agreement of the parties, and the net assets upon dissolution of the CJV at the expiry of the term of operation, may be transferred to the Chinese party without compensation so long as the foreign party has been able to recoup its capital contribution during the term of the CJV.

Always in contrast to EJVs, foreign companies can recover and repatriate their capital prior to the termination of a CJV, via preferential distribution of profits or products. This is conditional upon the Chinese partner receiving all the assets of the CJV upon its termination and, in principle, the approvals of the financial and tax authorities are received.

Taxation of Joint Ventures:

A) Taxes

As already mentioned it, Chinese government attracted foreign investors to invest in sino-foreign joint ventures by offering preferential treatment in the form of tax reductions or exemptions.

The Regulations of EJV (which apply also to CJVs), distinguish imported and exported items of a joint venture which can enjoy a friendly tax treatment.

Except for those export items restricted by the State, taxes on export products of a joint venture may be reduced, exempted or refunded in accordance with the relevant provisions of the Chinese tax law.

Taxes on the following import items by a joint venture may be reduced or exempted:

•  machinery, equipment, parts and other materials (“other materials” mean required materials for the joint venture’s construction on the factory site and for the installation and reinforcement of machines,) which are part of the foreign party’s share of investment according to the provisions of contract;

• machinery, equipment, parts and other materials imported with funds which are part of the joint venture’s total investment;

• machinery, equipment, parts and other materials imported by the joint venture with additional capital under the approval of the examination and approval authority, and for which China cannot guarantee production and supply;

• raw materials, auxiliary materials, components, parts and packaging materials imported by the joint venture for production of export goods.

However, the taxation for foreign-invested enterprises in China has considerably changed in the last decades, and joint ventures are subject to the great variety of different Chinese taxes.

As general rule, since the new 2008 Enterprise Income Tax Law, foreign enterprises, and therefore joint ventures, are treated as the same as domestic enterprises, with a general headline rate of taxation on its profits of 25%.

A JV can still get a taxation rate of 15% if there are regional and national incentive schemes in particular sectors of industry.   

A JV may also have to file various different types of tax return, monthly, quarterly or annually, covering Enterprise Income Tax, Value Added Tax, Consumption Tax, Stamp Duty, Land Appreciation Tax, Withholding Tax (on foreign remittances), and, if there are employees, Individual Income Tax and Social Security contributions, which are withheld from pay on a “pay as you earn” (PAYE) basis.

B) Financial Affairs and Accounting

The procedures for handling financial affairs and accounting of a joint venture are formulated in accordance with China’s relevant laws and procedures on financial affairs and accounting, and in consideration of the conditions of the joint venture. The fiscal year of a joint venture coincides with the calendar year of the Gregorian calendar (from 1 January to 31 of December).

A joint venture has to employ a chief accountant, and if necessary, also a deputy chief accountant, to assist the general manager in handling the financial affairs of the enterprise.

Except the small joint ventures, it is mandatory to appoint an auditor responsible for checking financial receipts, payments and accounts, and to submit reports to the board of directors and the general manager.

The accounting of a joint venture has to adopt the internationally accepted accrual basis and debit and credit accounting system in their work. All vouchers account books, statistical statements and reports prepared by the enterprise has to be written in Chinese. A foreign language may also be used concurrently with mutual consent.

In principal, a joint venture will adopt Renminbi as the standard currency. In keeping accounts, however, another currency may also be used through consultation by the parties concerned.

In addition to the use of standard currency to record accounts, joint ventures have to record accounts in currencies actually used in payments and receipts, if such currencies in cash, bank deposits, funds of other currencies, creditor’s rights, debts, gains, expenses, etc., are inconsistent with the standard currency in recording accounts.

Where foreign currency is used as the standard currency in accounting, the joint venture has to convert the foreign currency into Renminbi in its financial accounting reports.

Where funds are converted to the currency of a particular account, the difference caused by differing exchange rates has to be recorded as profit or loss on exchange.

Recorded fluctuations in exchange rates and the book amounts of the various related foreign currency accounts will undergo accounting treatment during the year-end closure of accounts in accordance with China’s relevant laws and its financial accounting system.

The principles of profit distribution after payment of taxes in accordance with the Income Tax Law of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises are as follows:

• allocations for reserve funds, bonuses and welfare funds for staff and workers and development funds of the joint venture and the proportion of allocations are decided by the board of directors;

• reserve funds can be used to make up the losses of the joint venture, and with the consent of the examination and approval authority, can also be used to increase the joint venture's capital for production expansion;

• after the reserve funds, bonuses and welfare funds for staff and workers and development funds have been deducted, if the board of directors decides to distribute the remaining profit, it should be distributed according to the proportion of each party's investment.

Profits cannot be distributed unless the losses of previous years have been made up. Remaining profits from the previous year (or years) can be distributed together with the profit of the current year. 

Only after being examined and certified by an accountant registered in China can the following documents, certificates and reports be considered valid:

• certificates of investment from all parties to a joint venture (lists of assessed value and agreements signed by parties to the joint venture shall be attached, where involving the use of materials, site use rights, industrial property and proprietary technologies as contributions);

• annual financial reports of the joint venture;

• financial reports on liquidation of the joint venture.

A joint venture will submit quarterly and annual financial reports to the parties to the joint venture, the local tax authority and the financial department.

C) Foreign Exchange Control

All matters concerning foreign exchange for joint ventures are regulated by the Rules of the People’s Republic of China on Foreign Exchange Control and relevant provisions of administrative measures.

With a business license, a joint venture may open foreign exchange accounts and Renminbi accounts with banks within the territory of China. The bank handling the accounts of the joint venture is in charge has to exercise supervision of receipts and expenditures.

A joint venture is required to obtain a permission from the State Administration of Foreign Exchange or one of its local branches to open a foreign exchange deposit account with an overseas bank or one in Hong Kong or Macao, and report to the State Administration of Foreign Exchange or one of its local branches its foreign exchange receipts and expenditures, and provide account balance sheets.

Branches and divisions set up by a joint venture in foreign countries or in Hong Kong or Macao have to submit its annual statement of assets and liabilities and annual profit report to the State Administration of Foreign Exchange or one of its local branches through the joint venture.

A joint venture may, in accordance with its operation needs, apply to a financial institution inside China for foreign exchange loans and Renminbi loans. It may also borrow foreign exchange from banks abroad or in Hong Kong or Macao, and carry out procedures for registration or filing for record with the State Administration of Foreign Exchange or one of its local branches.

After foreign staff and workers and staff and workers from Hong Kong and Macao have paid income tax on their salaries and other legitimate incomes in accordance with the law, they may remit outside China the remaining foreign exchange after deduction of their living expenses in China.

D) Off-shore Joint Ventures

Foreign investors often support their joint ventures in China with an offshore investment holding company (OHC).

There are many factors which drive the choice of OHC, and the so-called “tax-efficiency” is probably the most important.

For taxes purpose, the foreign investor needs to ascertain whether there is a double tax treaty (DTT) covering the types of revenue streams that are likely to be coming out of the JV as between China and the jurisdiction where the OHC is established.

DTTs generally cover loan interest, dividends and distributions, income taxes, royalties and capital gains.

The tax treatment of dividends tend to be less important in terms of determining the location of the OHC because, currently, China exempts dividends by FIEs to their foreign shareholders from withholding and other taxes.

Popular DTTs for investment in China are the PRC-Mauritius DTT, but the provisions on capital gains do not apply to FIEs whose principal assets comprise real estate assets, the PRC-Netherlands and PRC-Malaysia.

However, many industries in China, such as telecommunications, fund management, banking, venture capital and others, require that the foreign investor meets some requirements which may preclude using a special purpose vehicle (SPV) as the OHC.

The foreign investor, when it structures its JV supported by an OHC, should also consider the tax implications of repatriating funds from the OHC to the foreign party’s home jurisdiction, and the DTTs (if any) between OHC jurisdiction and the foreign investor’s home jurisdiction.

Staff, Workers and Trade Unions in Sino-Foreign Joint Ventures

A JV is allowed to hire its staff without the intermediation of a Chinese recruitment agency, and it can employ both Chinese and foreign workers.

The employment, recruitment, dismissal and resignation of staff and workers of joint ventures, and their salary, welfare benefits, labor insurance, labor protection, labor discipline and other matters are handled according to the relevant provisions of the State on labor and social security.

The individual labour contracts must be submitted for approval to the local labour bureau and they have to meet some minimum requirements such as:

• follow a format prescribed by the local labour administration;

•  be written in Chinese;

• include at least a minimum of seven clauses as prescribed by Article 19 of the Labour Act.

 As general rule, a direct employment may be terminated for just cause provided that the employer is able to prove the employee’s conduct or behavior, or the event which makes impossible to continue the employment relationship, and with 30 days notice.

The Regulations of EJV introduce the principle of distribution “to each according to his work, and more pay for more work” for the salary and bonus systems of joint ventures.

Joint ventures should provide to their workers and staff professional and technical training and establish a strict examination system so that they can meet the requirements of production and managerial skills in a modernized enterprise.

Salaries and remuneration of the general manager, deputy general manager(s), chief engineer, deputy chief engineer(s), chief accountant and deputy chief accountant(s), auditor(s) and other senior officials are decided upon by the board of directors.

Wages, income and other legitimate income earned by equity joint venture employees of foreign nationality may be remitted abroad in accordance with the exchange control regulations after payment of individual income tax pursuant to tax laws of the People’s Republic of China.

Staff and workers of a joint venture have the right to set up a grass-roots trade union and carry on trade union activities in accordance with the Trade Union Law of the People’s Republic of China and the Articles of Association of Chinese Trade Unions.

The joint venture shall actively support the work of the trade union, and, in accordance with stipulations of the Chinese Trade Union Law, provide housing and facilities for the trade union's office work, meetings, and welfare, cultural and sports activities. The joint venture has also to allot an amount of money totaling two percent of all salaries of the joint venture’s staff and workers as trade union’s funds, which the trade union of the joint venture has to use according to the relevant managerial rules for trade union funds formulated by the China Federation of Trade Unions.

Trade unions in joint ventures are representatives of the interests of the staff and workers. They have the power to represent the staff and workers to sign labor contracts with joint ventures and supervise the execution of these contracts.

The basic tasks of the trade unions in joint ventures are:

• to protect the democratic rights and material interests of the staff and workers in accordance with the law;

• to help the joint ventures with the arrangement and rational use of welfare and bonus funds;

• to organize political, professional, scientific and technical studies, carry out literary, artistic and sporting activities;

• and to educate staff workers to observe labor discipline and strive to fulfill the economic tasks of the enterprises.

Trade union representatives have the right to attend as non-voting members and to report the opinions and demands of staff and workers to meetings of the board of directors held to discuss important issues such as development plans, production and operational activities of joint ventures.

Trade union representatives have the right to attend as non-voting members meetings of the board of directors held to discuss and decide on awards and penalties to staff and workers, salary systems, welfare benefits, labor protection and labor insurance, etc., and the board of directors has to heed the opinions of the trade union.

Settlement of Disputes in Sino-Foreign Joint Ventures

The disputes arising over the interpretation or execution of the agreement, contract or articles of association between the parties to the joint venture, if possible, may be settled through friendly consultation or mediation. The disputes that cannot be settled through these means may be settled through arbitration or judicial means.

Parties to a joint venture may apply for arbitration in a Chinese arbitration institution or another arbitration institution in accordance with their written arbitration agreement.

If there is no written arbitration agreement between the parties to a joint venture, each side may file a suit with a Chinese court.

During the process of solving disputes, except for matters in dispute, parties to a joint venture can continue to carry out other provisions stipulated by the agreement, contract and articles of association of the joint venture.

For setting up a JV in China, please visit our China Company Formation page

Joint Ventures Guide in China

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