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.
On this page
- Total investment
- Establishment procedures
- Legal liability
- Office lease
As a foreign investor, there are two major reasons to create a JV:
- when entering a certain industry requires a local partner according to the restrictions outlined in the PRC Foreign Investment Industrial Guidance Catalogue
- when a local partner is able to offer tangible benefits such as:
- well established distribution channels
- well established government relationships
- significant knowledge of the local market
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 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:
- 30,000 RMB if the JV has two or more foreign investors, or
- 100,000 RMB if the JV has only one foreign investor
Despite these minimum amounts, the authorities will approve the amount of registered capital on a case-by-case basis depending on:
- intended business activities
- scale of operation
- location of the JV
The amount is then written into the company’s articles of association.
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.
- The use of local partner’s existing workforce and facilities
- Existing channels for sales and distribution
- Use of a partner’s network to build good relationships, avoid red tape and other bureaucratic complexities
- Entry into industrial sectors which exclude wholly foreign-owned investment
- Cost & complexity of establishment – authorities carefully inspect all documents presented to them and may ask for clarification or changes
- Conflicting interests with partners
- Merging different management styles
- Liability associated with inheriting staff
- Risks with technology transfer and intellectual property management
- Division of profits
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:
- an enterprise created with capital investments from both foreign entities and domestic companies, where profits are distributed according to the ratio of contributions
- a limited liability company, holding an independent legal identity
- much more rigid than that of the CJV, particularly with respect to profit sharing
EJVs must have:
- a minimum of 25% of the investment from the foreign partner
- a two-tiered management structure made up of a board of directors and a management team (general manager and deputies) that is contractually appointed and legally responsible for the daily operations of the company
Cooperative joint venture (CJV)
- is an enterprise created with capital investment from both foreign entities and domestic companies, where profits are distributed between the investors in a proportion that may differ from the proportionate ownership interest of each investor
- can sometimes allow for the recovery of the foreign partner’s capital to be accelerated
- was a more common model in the past, when Chinese partners supplied land and labour, while the foreign partner supplied technology and capital
- can be structured as:
- a limited liability company, or
- a non-legal person (similar to a partnership formed by contract) where the liabilities of the CJV flow through to the investors of the CJV
CJVs require the same two-tiered management as EJVs.
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.
- A letter of intent or memorandum of understanding must be written and signed by all partners
- Submit JV name for approval by the local Administration for Industry and Commerce (AIC)
- AIC requires one name and two alternates to be submitted
- A JV contract and articles of association must be written and signed by all partners
- Pre-approval from the National Development and Reform Commission (“NDRC”) may be required:
- where the JV will be acquiring land or other fixed assets; or
- where the capital investment in the JV will be significant
- Certain other 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 briefly describing the JV
- Feasibility study setting out the JV’s investment size and purpose, operational and management structure, number of employees, utility requirements such as power and water, brief description of supply and distribution network, 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
- Copy of passport for (i) JV’s director, (ii) JV’s legal representative, and (iii) JV’s 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, 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 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:
- 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
- Tax reports should be submitted to the Tax Administration Department on a monthly, quarterly and annual basis
- 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 certificate of financial registration from the local Finance Bureau
- Obtain an import-export license from the Customs House
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.
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.
- Date Modified: