How to establish an equity joint venture in
China?
A:Equity
joint ventures are the second most common manner in
which foreign companies enter the China market and
the preferred manner for cooperation where the
Chinese government and Chinese businesses are
concerned. Joint ventures are usually established to
exploit the market knowledge, preferential market
treatment, and manufacturing capability of the
Chinese side along with the technology,
manufacturing know-how, and marketing experience of
the foreign partner.
Normally operation of a joint venture is limited to
a fixed period of time from thirty to fifty years.
In some cases an unlimited period of operation can
be approved, especially when the transfer of
advanced technology is involved. Profit and risk
sharing in a joint venture are proportionate to the
equity of each partner in the joint venture, except
in cases of a breach of the joint venture contract.
Share holdings in a joint venture are usually
non-negotiable and cannot be transferred without
approval from the Chinese government. Investors are
restricted from withdrawing registered capital
during the live of the joint venture contract.
Regulations surrounding the transfer of shares with
only the approval of the board of directors and
without approval from government authorities will
probably evolve over time as the size and number of
international joint ventures grow.
There are specific requirements for the
management structure of a joint venture but either
party can hold the position as chairman of the board
of directors. A minimum of 25% of the capital must
be contributed by the foreign partner(s). There is
no minimum investment for the Chinese partner(s).
It is preferable that foreign exchange accounts
are balanced in order to remit profits abroad so
that the repatriated foreign exchange is offset by
exports from the joint venture. With the elimination
of foreign exchange certificates and the further
opening of the China market, this requirement is
becoming more and more relaxed.
The permissible debt to equity ratio of a joint
venture is regulated depending on the size of the
joint venture. In situations where the sum of debt
and equity is less than US$ 3 million, equity must
constitute 70% of the total investment. In joint
ventures where the sum of the debt and equity is
more than US$ 3 million but less than US$ 10
million, equity must constitute at least half of the
total investment. In cases where the sum of the debt
and equity is more than US$ 10 million but less than
US$ 30 million, 40% of the total investment must be
in the form of equity. When the total investment
exceeds US$ 30 million, at least a third of the sum
of the debt and equity must be equity.
Equity can include cash, buildings, equipment,
materials, intellectual property rights, and
land-use rights but cannot include labor. The value
of any equipment, materials, intellectual property
rights, or land-use rights must be approved by
government authorities before the joint venture can
be approved.
After a joint venture is registered, the entity
is considered a Chinese legal entity and must abide
by all Chinese laws. As a Chinese legal entity, a
joint venture is free to hire Chinese nationals
without the interference from government employment
industries as long as they abide by Chinese labor
law. Joint ventures are also able to purchase land
and build their own buildings, privileges prevented
to representative offices.
