Joint Venture (JV)

A Joint Venture (JV) is a business association of two or more entities (enterprise, administration, or person) agreeing to develop and control together, for a limited period, a new business entity and new assets by combining investment and operation expenses, management responsibilities, and profits and losses. Certain business sectors are controlled by Chinese administration (e.g. education, mining, health care). This requires foreign firms to form JVs with Chinese companies in order in order to enter the market. Joint ventures can be profitable when the Chinese side brings certain aspects to the partnership such as administrative support, brand recognition, property, licenses, and distribution or supplier network. Chinese authorities encourage foreign investors to use this form of corporation in order to gain experience in the technology and management fields.

Prior to deciding on the JV type, your purpose must be clear and well thought through. There are two types of Sino-Foreign Joint Venture possible: Equity JV and Cooperative JV

Equity Joint Venture (EJV):

The older and second most common way foreign firms enter the Chinese market, Equity Joint Ventures (EJV) have limited liabilities as well as a limited time period (usually 30 to 50 years, though an unrestricted period of operation can be permitted).

In an EJV, capital investment is made by the associates is proportionate to the equity invested by each party (e.g. Company A invests 45% of the total capital, so Company A collects 45% of the profits). In general, foreign companies must invest more than 25% of the total investment. The allowed debt to equity ratio of an EJV is regulated depending on the size of the joint venture (e.g. If the initial capital investment exceeds $30 million, a minimum of one-third of the total debt and equity must be equity).

Registered EJVs in China are considered Chinese entities, therefore required to obey all Chinese laws. EJVs can hire Chinese employees and purchase land to construct buildings (≠RO). The supervision of the EJV is in hands of a Board of Directors (at least three members).

Cooperative Joint Venture (CJV)

Cooperative Joint Ventures (Contractual Joint Venture or CJV) offer more flexibility since there is no minimum financial investment for foreign companies (and can therefore be a minor shareholder). The investment made by all parties does not need to be explicitly listed the initial financial contribution. Instead, parties can state contributions of labor, resources, services, knowledge, etc. CJV can be registered as a limited liability corporation, a non-legal individual, or a separate legal entity bearing liabilities independently.

CJVs profits are allowed to be divided up according to the terms of the CJV contract rather than by participation share. There are no terms or provisions in CJVs for terms of duration. CJV contracts may be renewed subject to the approval of the companies and authorities involved. Any type of equity change made during a CJV must be approved by the Ministry of Foreign Trade and Economic Cooperation.

Finally, CJVs are evaluative and can be restructured into WFOEs. However, many details must be negotiated beforehand thus costing time and money to set up a comprehensive CJV.

EJV vs. CJV

• Unlike an EJV, a CJV does not need to be a legal representative to register.
• Unlike an EJV, a CJV does not need to distribute its profits, control, and risks according to the ratio of the initial capital investment made by each party. Instead, CJVs distribute its profits, control, and risks according to the contract terms agreed upon by each party.
• Unlike an EJV, a company of a CJV can not only contribute an initial financial investment, but it can also supply cooperative circumstances (e.g. market access rights, licensing rights, etc.) and give access to controlled sectors (Chinese companies only).

JV SETUP FLOW CHART

Pre-name Registration (State Administration of Industry and Commerce - SAIC)

                      

              

Approval of Joint Venture Certificate
Ministry of Foreign

              

Economical Cooperation Bureau
(MOFEC)

                      

Apply for Business License (SAIC)

                      

              

Company Chops (Public Security Bureau – PSB)

              

Organization Code License (Technical Supervision Bureau - TSB)

                      

Tax Certificate (Tax Bureau-TB)

                           

    

Foreign Exchange Approval and
Registration (State Administration of Foreign Exchange - SAFE)

    

Open Bank Account (Foreign Currency & RMB)

                           

Capital Investment (from overseas bank account)

Capital Verification Report (Certified Public Accountant - CPA)

                      

              

Statistics License Registration

              

Financial Certificate Registration

Note: Only trading and manufacturing JVs are allowed to apply for a trading license. To obtain this license, the steps are listed below.

JV TRADING LICENSE FLOW CHART

Obtain the Import/Export Registration (Misnistry of Commerce- MOFCOM)

SAFE Registration for Import/Export (State Administration of Foreign Exchange - SAFE)

Custom Registration Process – E-port Card (Customs)

SAIC Registration for Inspection
and Quarantine (SAIC)

VAT GENERAL TAX REQUIREMENT PROCESS

VAT Tax Application
(Tax Bureau)

Office Inspection
(Tax Bureau)

Export Return Registration
(Tax Bureau)

Note: The entire registration process including an import/export license takes about 5 months (4 months without the import/export license).

DOCUMENTS REQUIRED FOR REGISTRATION

Depending on which type of JV you would like to set up, both foreign and Chinese investors must provide different documents to the government (photos, government-issued identifications, passport copies, business licenses, company stamps, articles of association, bank reference letters, letters of authorization, etc).

For more information on JVs, please contact us at info[at]beijingretail.net