Equity joint ventures in China are some of the most preferred business models by foreign companies to enter the Chinese market after the wholly foreign-owned enterprise (WFOE). Joint ventures are often established to benefit from local market know-how, profitable business strategies in a new economy, and the production capacity of the Chinese partner.
Moreover, they also benefit from the technology, manufacturing know-how, and marketing experience of the foreign partner. Several well-known corporations function on equity joint ventures in China.
Joint Ventures and Equity Joint Ventures China
The Joint Venture (JV) company structure in China involves at least one Chinese business partner. This may be either an individual or a corporate. This type of venture is a limited liability company created through a mutually agreed partnership between a foreign-invested enterprise (FIE) and Chinese investors. These partners will share the costs, rewards, liabilities, risks, and management of the joint venture.
Joint Ventures (JV) may either be a Cooperative Joint Venture (CJV) or Equity Joint Venture (EJV).
In a CJV, the company is structured as a limited liability company in China or a non-legal entity. The profits are distributed in a manner that has been mutually agreed upon.
On the other hand, an Equity Joint Ventures (EJV) is structured as a limited liability organization in which the profits and losses are divided among the foreign and Chinese partners according to the ratio of capital contributions (or equity).
Equity Joint Ventures in China are established through a joint venture contract between the foreign partners and their Chinese counterparts after approval of the Ministry of Commerce (MOFCOM) or its local equivalent, and other relevant departments.
They are governed primarily by the Chinese-Foreign Equity Joint Ventures Law (also known as the Joint Venture Law) and the Implementing Regulations for the Joint Venture Law.
However, the new Foreign Investment Law, which came into effect on January 1, 2020, abolished the distinctions between the EJV and CJV structures.
Why Choose Equity Joint Venture in China?
Amidst the continuously growing competitive market and the slowing Chinese economy, joint ventures are increasingly becoming the preferred strategic investment to enter the market or expand into China. Joint ventures allow shareholders access to local networks and resources while also reducing their risks.
The primary reasons a company in China may choose to enter a joint venture in China are-
- First, JVs allow a foreign entity to enter a ‘restricted’ industry sector that has been categorized under China’s Negative List.
- Secondly, JVs enable a foreign corporation to utilize the local resources, the know-how, sales channels, and distribution networks provided by the Chinese partner. This can greatly assist in the initial operations and the expansion of the business.
Other advantages include having a local ready-made company structure before entering a new market, increased efficiency by ascertaining assets and operations, sharing risks in complex and bureaucratic projects, etc.
The Term and Scope of an Equity Joint Venture in China
Joint ventures are usually limited to a fixed term that is outlined in the joint venture contract. Typically, this period ranges between 5 years and 50 years, depending upon the size and nature of the project. Most sizable manufacturing ventures agree to a term of 25 years or more.
Although indefinite terms are permitted under the approval of the government, certain service industries, land development and real estate, natural resource exploration and exploitation projects, and similar ventures are restricted to a fixed term.
Once the term has ended, the established equity joint venture China is dissolved. After clearing the debts, the remaining property is divided among the involved parties according to the ratio of capital contributions (or equity) at the time of joint venture agreement.
Under the corporate law regime, all entities in China (domestic or foreign) have definite business scopes approved by the governing authorities. The scope of a corporation defines the range of business activities the entity is permitted to engage in. The scope of businesses is usually brief and highly specific (HR solution in China here).
Investments of Partners
When dealing with equity joint ventures in China, the most important aspect is the concepts related to the capitalization of equity- registered capital and total investment.
In the joint venture legislation, registered capital is defined as the total amount of paid-in capital contributions by the respective parties to the joint venture. On the other hand, the total investment is the amount equal to the registered capital plus the permitted financing for the joint venture.
The capital of joint ventures in China must meet a certain debt to equity ratio. Say, if the total investment is less than USD $3 million, at least 70% of the total investment must be registered capital.
Capital contributions may range from cash to buildings, equipment, technology, materials and the right to use land.
Tax in Equity Joint Ventures
Owing to the numerous types of taxes applicable in China, a joint venture may be subject to monthly, quarterly, or annual tax returns. This may include income tax, value-added tax, business tax, consumption tax, stamp duty, land appreciation tax, and/or withholding tax.
For employees, additional income tax and social security must be considered.
For a foreign enterprise, the standard rate for tax on profit made by a joint venture is 25%, the same as any Chinese-owned company.
The establishment of an equity joint venture in China is a long process that requires careful considerations, negotiations at several turns, and a stock-pile of documents and formalities to finalize. However, the rewards are worth the wait.