While the Chinese government is continuously opening various categories of industries for foreign investors, there are still limitations and restrictions in specific areas for foreign companies without a Joint Venture partner.
However, the Chinese government encourages local corporations to join together with foreign investors to integrate technics, investment, and management experience, while foreign companies obtain easier access to the market and expand their market share.
Thinking of opening a JV?
There are two forms of Joint Venture partnerships between foreign and Chinese corporations recognized by the Chinese government: equity joint venture and Cooperative joint venture, depending on investment method and liability.
An equity joint venture (EJV) is formed by the contribution of equity from both foreign and Chinese partners on the principle of mutual benefits and limited liability. The foreign investors need to contribute at least 25% of the equity of the company. This ratio is subject to increase to a maximum of 70% (up to USD 3 million) depending on the total registered capital of the joint venture. Investment can be in the forms of cash, real estate, industrial property, equipment, or technology, whose “market value” needs to be assessed by an independent third party. Failure to land the investment capital within a certain time window may lead to a penalty of fines.
Cooperative Joint Venture (CVJ), so known as a contractual joint venture, comes into two forms: limited liability or unlimited liability. The requirement and regulations of forming a limited liability CJV are very similar to that of an EJV. The foreign entity should provide the majority of the funds and technology, whilst the Chinese partner contributes land, facilities, natural resources, manpower, and a limited amount of money. Compared to EJV, the major difference is that there is no minimum capital requirement for foreign investors.
The unlimited liability CJV is starkly different from EJC and limited liability CJV. Unlike the former, an unlimited CJV provides a means by which a negotiated partnership can be affected by two partners. In this way, a foreign partner can provide capital or expertise that is not directly tied to equity in the partnership. What this means, is that the partner can take a minority stake in the partnership. What‘s more, the partners do not need to establish a new entity to represent them; both partners in the joint venture provide funds, assets, and technology directly in line with the articles of the joint venture, including levels of management. As control of the partnership is not dependent on equity stakes, the foreign partner may also recover their investment in the event that the joint venture ends and reverts to the Chinese partner, so long as those terms are written in the articles at the start of the venture.
There remain many industries that are closed to foreign companies in China, often on the grounds of heritage or national security. For instance, hospitality, chemical, and automotive companies. If you are planning to operate in those limited areas, you still need to cooperate with a Chinese partner to form a joint venture.
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For the production and operation income obtained by the natural person partner from a JV, the partnership enterprise shall declare and pay the individual income tax payable by the investor to the competent tax authority at the place where the enterprise actually operates and manages.
The income distributed by a legal person partner from a JV shall be included in the total annual income of the partner, and shall be reported and paid to the competent tax authority at the place where the legal person partner is registered.
There are some principles when deciding the amount and ratio of tax payment of each partner:
No. A JV does not have an independent legal personality and is an unincorporated organization.
A JV can be established by natural persons, legal persons, and other organizations. A partnership enterprise shall have at least two partners. A limited liability JV shall have at least 50 partners and at least one general partner. Solely state-owned companies, state-owned enterprises, listed companies, public welfare institutions, and social organizations are not allowed to be the general partner of a JV.
Responsibilities and decision-making structures are outlined in the JV agreement. Partners may share management experience, or one partner might be responsible for certain aspects while the other handles different aspects.
Yes, it's possible to convert a JV into a different structure, such as a wholly-owned subsidiary or merger, depending on the partners' agreement and legal requirements.
For general partners, they can contribute money, physical objects, intellectual property rights, land use rights, or other property rights, or use labor services (natural talents can make labor service contributions).
Limited partners may make capital contributions in currency, physical objects, intellectual property rights, land use rights, or other property rights, and limited partners may not use labor services to make capital contributions.
Sound United Vice President > Asia Pacific
Sound United is the leading designer and manufacturer of consumer audio products in the US. Sound United has been using Hongda since 2013. Moving one’s operation to China is not a small task, But Hongda’s expert services helped us set up a company and deal with tax issues so we could get on with growing our business in no time at all, and that’s why we continue to use them today.
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