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

Establishment procedures

Requirements

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.

Pre-licensing

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 State Administration for Market Regulation (SAMR) . 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 SAMR;
- 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.

Licensing

Once the JV receives an approval certificate, investors need to register for a business license with the SAMR. The SAMR 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 and 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.

Registration certificate

To register a JV, the foreign investor, as well as the Chinese partner, needs to have the following documents.

Key positions

In a JV, the board of directors has the highest authority.

Office/lease requirements

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.

Changes under Foreign Investment Law

For existing foreign-invested enterprises (FIEs) in the form of a CJV or EJV, they need to change their governing structure within the five-year transitional period to the three-tier structure in order to make the governing structure of the company clearer, avoiding situations in which the board of directors make decisions with absolute power:

the board of shareholders
the board of directors
the manager

Board resolutions on significant matters must be reviewed and approved by shareholders holding two-thirds or more of the voting rights at the shareholders’ meeting, to avoid the company being trapped by deadlock.

For existing CJVs, the impact of the new Foreign Investment Law (FIL) depends on whether they have legal person status.

If they are with legal person status currently, they will need to restructure during the five-year transitional period into a limited liability company or joint-stock company.
If they are without legal person status, then they can transfer within the five-year transitional period to a partnership enterprise or a limited liability company or joint-stock company.

After the FIL is fully implemented, there will no longer be FIEs in the form of CJVs.

Existing EJVs will need to amend their article of associations and change their governing structure and operating rules within the five-year transitional period.

**New FIL’s Impact of EJV**
Item	Under EJV Law	Under new FIL
Organization form	Limited liability company	No limitation, could be limited liability company or joint stock company
Foreign investor’s shareholding ratio	Generally no less than 25%	No limitation unless otherwise stipulated in the Negative List
Highest authority	Board of directors	Board of shareholders or the general meeting of shareholders
Board of shareholders	No board of shareholders	Board of shareholders or the general meeting of shareholders
Board of directors	The board of directors shall comprise no less than three members; Directors shall be appointed and removed by EJV parties; Where a Chinese national takes the position of chairman, the position of the deputy chairman shall be held by the foreign party, or vice versa; The tenure of a director shall be four years; The following matters shall be resolved unanimously by the directors who are present at the board meeting – Amendment of the EJV's articles of association; Termination and dissolution of the EJV; Increase or reduction of the EJV's registered capital; Merger or division of the EJV. Company can choose to appoint an executive director instead of establishing a board of directors; The board of directors shall comprise three to 13 members for limited liability companies, or five to 19 members for joint-stock companies; Directors who are not employee representatives shall be elected and replaced by the Board of Shareholders/Shareholder; The tenure of a director shall not exceed three years; The board of directors shall exercise the following duties and powers Convene shareholders’ meeting and report to the board of shareholders; Execute the resolutions passed by the board of shareholders; Decide on the business plans and investment schemes; Formulate the basic management system of the company; Formulate operational plans such as the annual financial budget and financial accounting plan, the profit distribution plan, the loss recovery plan, plan for increase or reduction of registered capital, etc.
Supervisor	Board of Supervisor(s) is not obligatorily required	Board of supervisors should comprise no less than three members; Limited liability companies with fewer shareholders may appoint one to two supervisors instead of establishing a board of supervisors. The tenure of supervisor is three years; Directors and senior management personnel shall not hold the post of supervisor concurrently.
Legal Representative	Chairman	Chairman, executive director, or manager
Senior management personnel	Where Chinese party takes the position of General Manager, the position of the vice-General Manager shall be held by the foreign party, and vice versa.	No limitation
Requirements on intellectual property (IP) contribution	The IP contributed by the foreign party as its investment in the company must be: Capable of remarkably improving the performance and quality of the existing products and enhancing productivity; Capable of remarkably saving in raw materials, fuel or power.	No special limitation, but IP used as capital contribution needs to be evaluated and verified, and shall not be overvalued or undervalued.
Equity transfer	One party of the EJV is not allowed transfer its equity without the other parties’ consent and the authority in charge’s approval. The other party of the EJV have pre-emptive right to purchase. Shareholders are free to transfer their equity to other shareholders; A shareholder proposing to transfer its equity interests to a non-shareholder shall obtain the consent of more than half of the other shareholders – The shareholder shall inform the other shareholders of the proposed equity transfer in writing and seek their consent, Failure to reply within 30 days from receipt of the written notice shall be deemed as consent to the proposed transfer, Where more than half of the other shareholders do not consent to the proposed transfer, the non-consenting shareholders shall acquire such equity interests, failing which they shall be deemed to have consented to the proposed transfer, The other shareholders shall have pre-emptive right to acquire such equity interests on similar term.	Where there are any other provisions on equity transfer is regulated in the article of association, such provisions shall prevail.
Profit distribution	Profit shall be distributed strictly according to registered capital ratio subscribed by each investor.	Profit share should be distributed according to the ratio of paid in capital for limited liability companies or the shareholding ratio of the shareholders for joint-stock company, unless it is otherwise agreed in the article of associations
Registered capital decrease	Registered capital decrease is prohibited, where capital decrease is necessary due to change of total investment or scale of production and business operation, the approval from authority in charge is required.	No limitation, as long as the creditor notification procedure is duly completed.
Statutory fund reserve	EJV allocates reserve funds, employee bonus and welfare funds, and company development funds with proportion to be decided by the board of directors.	Companies shall contribute 10% of the profits into their statutory surplus reserve until the aggregate sum of the statutory surplus reserve is more than 50% of its registered capital; Companies can also allocate after-tax profits to the optional surplus reserve as decided by the board of shareholders or the general meeting of shareholders.
Statutory causes for dissolution	Expiration of the EJV term; Inability to continue operations due to severe losses; Inability to continue to operation due to one party fails to fulfill its obligation under the EJV contract or article of association; Inability to continue to operation due to severe losses caused by force majeure; Fail to reach the operation objective; and Other cause for early dissolution regulated by the EJV contract and article of association. Expiration of the term regulated by article of association or occurrence of any event which leads to dissolution of the company; The dissolution decision has been passed by the Board of Shareholders; Where dissolution is required by a merger or split; The business license is revoked or the company is ordered to be shut down by laws; and Shareholder(s) who hold(s) more than 10% voting right require for dissolution due to severe difficulties in company’s business.

Disclaimer:

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 in part by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.

Date modified:: 2021-08-06

Language selection

Search