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Establishing a joint venture in China

A joint venture (JV) is a form of foreign invested enterprise (FIE) that is created through a partnership between foreign and Chinese investors, who together share the profits, losses and management of the JV. It is strongly recommended that prior to choosing this form of investment vehicle you consult with the foreign partner of an existing JV in order to better understand the advantages and disadvantages of the JV structure.

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Reasons

As a foreign investor, there are two major reasons to create a JV:

Total investment

This is the amount of capital required to start-up the business until it becomes self-sufficient from its investors. It is made up of two components:

Registered capital

Registered capital refers to the equity investment in a JV. This amount is fixed in the articles of association of a JV, and constitutes an investment commitment (subject to any increase or decrease of registered capital approved by the government).

The JV’s investors must pay 15% of the registered capital of the JV within the first three months after issuance of the business license (similar to a certificate of incorporation under Canadian law), with the balance due within the first two years. The minimum legal requirement is:

Despite these minimum amounts, the authorities will approve the amount of registered capital on a case-by-case basis depending on:

The amount is then written into the company’s articles of association.

Non-registered capital

Non-registered capital is essentially the amount of debt financing which the JV is permitted to obtain. There is no commitment to finance this portion of the investment but such debt financing may be obtained at the JV’s discretion. 

Advantages

Disadvantages

Models

The JV model presents a variety of options for management and financial structures broadly divided into the following two groups:

Equity joint venture (EJV)

An EJV is:

EJVs must have:

Cooperative joint venture (CJV)

A CJV:

CJVs require the same two-tiered management as EJVs.

Establishment procedures

The process to establish a JV will generally take between 4 to 6 months. Foreign investors may wish to engage a consulting company to represent their interests while establishing the JV, benefiting as well from their long standing relationships with local authorities and procedural know-how.

All applications must be submitted in Chinese and, in addition, may be written in a foreign language. Documents in both languages shall have equal validity.

Pre-Licensing

Licensing

Once the approval certificate has been received, investors must apply and register for a business license with the AIC.  AIC requires most of the same documents as MOC, plus its own standard filing forms.

Once a business license is issued, certain post-registration formalities must be completed including:

Supervision

JVs are also required to appoint at least one individual (of any nationality and residency) as the supervisor of the JV.  The supervisor’s primary role is to monitor the affairs of the JV and the directors of the JV, and to report any irregularities to the board of directors of the JV and to the investor(s) of the JV.

In addition to filling annual taxes, JVs must submit an annual audit report to the AIC.

A JV is a limited liability company, where the liability of the JV’s investor(s) is generally limited to the assets of the JV.

Office Lease

Before beginning the application process investors must lease office space for their future business. It is recommended that a clause be added to the lease voiding the contract without penalty should the JV application be rejected. Office relocation requires a tax clearance declaration report, essentially an audit of the company.

For more specific information or questions related to your foreign invested enterprise, please contact us.

 

The Canadian Trade Commissioner Service in China has prepared this report based on primary and secondary sources of information. Readers should take note that the Government of Canada does not guarantee the accuracy of any of the information contained in this report. Readers should independently verify the accuracy and reliability of the information.

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