How to Set up a Joint Venture in China

20 April 2020

Dear Members and Friends,

The China-Italy Chamber of Commerce is glad to share an article that Hawksford has published on How to Set up a Joint Venture in China.

Joint ventures (JV) are one of the corporate structures available to foreign investors to invest in and have access to the Chinese market. This article introduces how to establish a joint venture in China, including basic requirements, procedures, and timeline.

Differently from WFOEs (Wholly foreign-owned entity) and representative offices, a joint venture involves at least one Chinese partner which can be either an individual or a corporate.

Although local partnerships are not needed for many sectors which are now open to foreign investment, China has a negative list approach against the previous investment catalogue, there are several reasons why a JV could still make sense.

For example:

  • Entering a new or emerging market with a local ready-made structure.
  • Increasing efficiency by combining assets and operations.
  • Sharing risk in complex and bureaucratic investment projects.
  • Approaching skills, capabilities, and other tangible benefits that only a local structured partner could offer.

In short, a joint venture is a limited liability company that is created through a partnership between a foreign-invested enterprise (FIE) and Chinese investors, who share the costs, rewards, and the management of the JV.

Types of JV

After the announcement of new foreign investment law, which is effective on January 1st, 2020, previous distinctions between the equity joint venture (EJV) and cooperative joint venture (CJV) have been abolished.

Existing JVs incorporated before the discussion and implementation of the foreign investment law now have a five-year transition period to proceed with the changes required in their current corporate structure.

An EJV is a limited liability company where profits and losses are distributed by the ratio of capital contributions.
A CJV may be structured as a limited liability company or a non-legal person entity where profits are distributed in any agreed way.

Advantages of a Joint Venture

  • Access the business sectors which are restricted (not prohibited) in equity ownership terms by the Chinese authorities.
  • Gain insights from the local partner’s experience in doing business in China.
  • Leverage the partner’s existing channels for sales and distribution.
  • Obtain local treatment when participating in official and public tenders.

Disadvantages of a Joint Venture

  • The costly and lengthy process to scout for and engage a proper Chinese partner.
  • The complexity of establishment and ongoing maintenance.
  • Difficulties in merging different company cultures and management styles.
  • Intellectual property protection and management issue.
  • Conflicting interests represented at BoD (Board of Directors) level.
  • Division of profits.

Establishment Procedures

The incorporation process of a JV normally takes 5 to 6 months as it can be a complex corporate vehicle.

Before moving forward, it is important to determine if the foreign company is qualified to create a JV under China’s negative list.

Serving as an entry guide for foreign investors in China, the negative list refers to a comprehensive manual outlining certain areas where foreign investment and businesses are prohibited or restricted.

For industries listed under “restricted” terms, foreign companies are still allowed to invest in China but must meet specific conditions such as limit equity ratio and remaining shareholding under 51%.

Though there is no minimum registered capital required, the proportion of the investment contributed by the foreign investors shall generally not be less than 25% of the registered capital of the company.

For the service industry, it should be no less than USD 100,000, and the manufacturing industry is no less than USD 150,000.

The Right Partner

To find a qualified and reliable partner, rigorous research and due diligence on all aspects should be conducted in advance.

The first step for foreign investors is drawing up a list of one or more potential Chinese partners, listing the pros and cons of each case, and then go through independent due diligence to at least ensure the legal capacity and financial position of the partner.

The ideal partner will simply be the one whose resources, skills, and assets are complementary to the needs of the masterplan for the Chinese market.

Pre-Licensing

Once the partners are chosen, several documents need to be drafted or obtained, including the following:

1. Letter of Intent

After the foreign and Chinese counterparts reach an agreement on establishing a joint venture together, a letter of intent (LOI) should be drafted. The LOI is a non-binding document and normally states the prerequisites and conditions of co-operation in the Chinese market.

2. Project Proposal

Following the letter of intent, the Chinese partner is responsible for the preparation of the project proposal. The project proposal should contain the overall assumptions of the structure in which both sides will be stated as investors.

3. Feasibility Study

When receiving the approval of the project proposal, a feasibility study shall be prepared by both parties. As an indispensable step before investment decisions and a basis for further work, it analyzes the viability of the idea and meanwhile it gives a reality check to the future cooperation between the two or more investors.

4. Name approval of the JV

The local administration of industry and commerce (AIC) in the municipality which is responsible for the registered address of JVs normally requires a list of potential company names to be submitted and holds the final say in whether one of those names is approved or not. JVs should apply for the name registration within 30 days upon receiving the approval of the project proposal.

5. JV contract & articles of association

The purpose of a JV contract and articles of association is to lay down the principles of the organization, its methods of operation, and management rules or principles to be adopted. Both documents need to be in written forms and must be signed by all partners.

6. Leasing contract of the JV

While preparing the incorporation steps, investors need to select a leased office space for future business operations and to domiciliate the corporate entity. The need for a registered address and the assignment of entities to commercial or industrial locations depends on the specific business and industry that the JV will target.

7. Certificate of approval of the JV

Once the above documents are ready and accepted by the AIC, the municipal commission of commerce (MOC) will issue a formal approval letter in favor of the Joint Venture incorporation assigning the entity an enterprise code. An approval certificate is usually issued within 10 days, closing the first phase of the incorporation process.

Issuance of Business License

Upon receiving a certificate of approval for the establishment of a JV from the MOC, investors need to apply for a business license at the AIC within 30 days.

Once the business license is issued, the joint venture is legally established together with all the company information presented in the previous steps.

Summary

A successful joint venture can bring valuable opportunities to its business partners but still can be risky, especially for companies that do not have a strong relationship or a professional knowledge of the potential partner as well as the Chinese market and business customs in general.

Foreign investors are highly recommended to engage professionals’ advice from legal and financial perspectives before starting to negotiate the incorporation of a JV.

How Hawksford can help?

Hawksford is an established provider of company registration and outsourced corporate services in China. With 100 multilingual professionals based in Shanghai, Beijing, Suzhou, Guangzhou and Shenzhen, we are able to offer the very best local knowledge to our international clients.

The full article is available here. 

 

Kind Regards,

CICC Team

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