Equity joint
ventures
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.
Cooperative
joint ventures
In a cooperative
venture, the parties involved may operate as separate legal
entities and bear liabilities independently rather than as
a single entity. A cooperative venture may also be registered
as a limited liability entity resembling an equity joint venture
in operation, structure, and status as a Chinese legal entity.
There is no minimum
foreign contribution required to initiate a cooperative venture,
allowing a foreign company to take part in an enterprise where
they preferred to remain a minor shareholder. The contributions
made by the investors are not required to be expressed in
a monetary value and can include excluded in the equity joint
venture process can be contributed such as labor, resources,
and services. Profits in a cooperative venture are divided
according to the terms of the cooperative venture contract
rather than by investment share, allowing a more flexible
schedule for return on investment in cases where one investor
provides cash while the other party's investment is primarily
in kind.
Greater flexibility
in the structuring of a cooperative venture is also permissible
including the structure of the organization, management, and
assets. There is no term for unlimited terms in cooperative
ventures, but also no provisions for the term of the duration.
The term of the cooperative venture contract may be renewed
subject to the consent of the parties involved and approval
from the examination and approval authorities. The foreign
investor is permitted to withdraw their registered capital
or a portion thereof from the cooperative venture during the
duration of the cooperative venture contract.
Because of the
unique privileges and added features offered to the foreign
party in a cooperative venture, trade unions must be allowed
to represent the employees in employment matters to protect
the interests of the employees.
(Sources:
China Daily)
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