Establishing a Joint Venture in China
A Joint Venture (JV) is formed by one or more foreign investor(s), along with one or more Chinese entities. Usually, a foreign investor should own at least 25 percent of the shares, while a Chinese individual cannot normally be a shareholder in a JV except in certain circumstances.
Foreign companies usually set up a JV for the following reasons:
- A foreign company wants to invest in a restricted industry (as per the Negative List), which only allows JVs; and
- Foreign investor(s) wants to use the existing sales channels and networks of the Chinese partner with local market knowledge and contacts.
There are two types of JVs in China, differing in terms of how profits and losses are distributed:
- Equity Joint Venture (EJV)
- Profits and losses are distributed between parties in proportion to their respective equity interests in the EJV;
- Generally, the foreign partner should hold at least 25 percent equity interest in the registered capital of the EJV; and,
- Should be a limited liability company.
- Cooperative Joint Venture (CJV)
- Profits and losses are distributed between parties in accordance with the specific provisions of the CJV contract; and
- Can be operated either as a limited liability company or as a non-legal person.
Advantages of a JV
- Use of local partner’s existing workforce and facilities
- Existing sales and distribution channels
- Access to industrial sectors which exclude wholly foreign-owned investment
- The upfront investment required from the foreign investor likely to be lower for a JV than a Wholly Foreign-Owned Enterprise (WFOE) as shared with the JV partner
Applications need to be submitted in Chinese, and, in addition, may be written in a foreign language. Both documents are equally valid. Foreign enterprises are not allowed to directly submit the application documents to the authorities. They need to retain a PRC entity who is authorized by relevant authorities to act as an agent, who will submit the documents to the examination and approval authority on behalf of the foreign enterprise.
- Letter of intent or memorandum of understanding, JV contract, and articles of association must be written and signed by all partners.
- A JV name needs to be submitted for approval to the local Administration for Industry and Commerce (AIC). It requires one name and two alternates.
- In case the JV will acquire land or other fixed assets, or where the capital investment in the JV will be significant, pre-approval from the National Development and Reform Commission (“NDRC”) may be required.
- Certain government ministries may need to be consulted and to provide approval where the JV is to do business in a relatively regulated industry (for example health or education) or where the collateral impact of the JV’s proposed business activities require review (for example pollution, heavy energy usage).
- Obtain a certificate of approval for the establishment of the JV from the Municipal Commission of Commerce (MOC). The MOC application should include the following documents:
- Name pre-approval from AIC;
- Project proposal describing the JV;
- Feasibility study which should include the investment size and purpose, operational and management structure, number of employees, utility requirements such as power and water, a brief description of supply and distribution network, a brief estimate of revenues and expenses;
- JV contract and articles of association;
- Certificate of incorporation or equivalent of the corporate investor(s) (certified by the Chinese Embassy or equivalent overseas).
- For individual investors, a passport copy is required (certified by the Chinese Embassy);
- Capital credit certification from each investor’s bank;
- Passport copy of JV’s director, legal representative, and supervisor;
- Leasing contract for office space in China, certification of real-estate ownership, landlord’s identification;
- Letter of authorization (authorizing the JV to accept service in China on behalf of the investor(s));
- In some cases, a latest annual audit report from the foreign investor provided by a certified public accountant;
- Any prior reviews or approvals from government branches (for example land-use rights if required);
- Standard MOC filing forms.
Once the JV receives an approval certificate, investors need to register for a business license with the AIC. The AIC will ask for most of the same documents as MOC, as well as its own standard filing forms. Once a business license is issued, certain post-registration formalities need to be completed:
- Record establishment of the business and official seal engraving with the Division of Entry & Exit Administration of the local Public Security Bureau;
- Obtain certificate with the organization’s code number from the Technical Supervision Bureau;
- Register with and obtain certificates from both the state and local tax authorities;
- Register with the Administration of Foreign Exchange to create a foreign currency account;
- Open a local bank account;
- Register with and obtain a certificate from the Bureau of Statistics;
- Obtain a certificate of financial registration from the local Finance Bureau; and
- Obtain an import-export license from the Customs House.
The complete process to establish a JV usually takes four to six months.
To register a JV, the foreign investor, as well as the Chinese partner, needs to have the following documents:
- IDs of the Chinese and foreign investors;
- Chinese partner's local company business license with company stamp on it;
- CPA firm's capital verification report with Chinese partner's company stamp on it;
- Chinese partner's last year audit report with company stamp on it;
- List of board of directors in the Joint Venture;
- Chinese partner's local company's article of association.
- Certificate of Incorporations or Equivalent document certified by Chinese embassy or Chinese consulate overseas;
- Bank Reference Letters from investor’s bank to declare a good standing;
- Passport copy of:
- Parent company's director
- China company's Legal Representative and
- China company's supervisor
- Details about the Chinese Legal Representative;
- Introduction of the foreign investor(s) including name, address and telephone number;
- Registered capital, Business Scope, and proposed Chinese names of China JV;
- Office address, leasing contracts, certificate of real estate ownership, landlord identification documents;
- Letter of Authorization;
- The latest annual audit report copies from the parent company provided by a Certified Public Accountant (CPA) and Custom HS Code of proposed Import/Export products in China (only in case of a trading JV)
In a JV, the board of directors has the highest authority. The board should have no fewer than three directors appointed by the JV partners, with the ratio between Chinese and foreign appointed directors determined through mutual consideration.
JVs also need to have at least one supervisor to oversee the execution of the company duties by the director(s) and senior management. In addition, a general manager is also required for daily operations, whose position can be concurrently filled by the executive director or a member of the board of directors.
Investors should lease office space before they begin the application process. It is recommended that a clause should be added to the lease voiding the contract without penalty should the JV application is rejected. Office relocation requires a tax clearance declaration report.
The Canadian Trade Commissioner Service in China recommends that readers seek professional advice regarding their particular circumstances. This publication should not be relied on as a substitute for such professional advice. The Government of Canada does not guarantee the accuracy of any of the information contained on this page. Readers should independently verify the accuracy and reliability of the information.
Content on this page is provided by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.
- Date Modified: