1. Types and basic characteristics of joint venture (JV) in China
A sino-foreign joint venture designate a company having mixed capital between one or more foreign and Chinese investors. They are one of the two form of foreign invested companies that can be established in China. The other form are LLC, formerly called Wholly Owned Foreign Enterprises (WFOE). They are Limited Liability Companies that allow 100% investment and management control from a foreign investor, with no need or a Chinese investor.
The Chinese administration distinguishes actually two distinct categories of JV :
The equity joint venture (EJV) : an option that involves the legal incorporation of a limited liability company. It is a pattern chosen by most industrial companies having a sustainable activity. The distribution of profit is defined by contract, according to the shared capital contribution of the parties.
2. Retrospective and presentation of the joint venture in China
Right after the economic opening of the 80's, the sino-foreign joint ventures were the only legal form of commercial and industrial enterprises allowed as foreign investments in China.
The accession of China to the WTO in 2001 gradually permitted the set-up of companies with 100% foreign capital in many sectors, but not all of them. To this day, establishing a JV with a Chinese partner remains an option to invest in sectors considered sensitive or strategic. In this case, most of them remain accessible to foreign investors, but only if conducted under a sino-foreign JV entity. In 2023, some commercial or industrial investments in China are still forbidden under a 100% owned foreign enterprise status.
Until the year 2015, the central administration published a Catalog of foreign investments in China which classified them, by sector of activity, as encouraged, authorized, regulated or prohibited. This Catalog is no longer valid. It has been replaced by a "negative List" of the foreign investments in China which latest version of august 2020 is still the one in force.
The directives give a global perimeter of activities allowed to foreign investors at a national level. Some industrial zones or investment parks with a special status can authorize foreign investors to benefit from preferential investment conditions. Some Free Trade Zones (FTZ) may also offer interesting investment conditions. They may be access to production facilities, financial benefits and tax refunds, special China customs status, etc.
As an example, the Chinese government grants incentives to the foreign investors who develop projects in the western provinces (the least developed such as Xinjiang, Ningxia or Gansu). Since over 10 years, some additional measures aim to encourage foreign investors to invest in high-tech, energy saving and green business fields.
3. Possible business restrictions for foreign investors
Some limitations may, depending on the sector of activity, result in :
- a (very) high minimum registered capital level for a given sector. It means a high entry cost
- a maximum proportion of authorized investment for the foreign party that does not allow to hold the shares majority (for example, a maximum 49% for the foreign investor)
- For JV projects that allow the foreign party to hold a majority of the company shares, the minimum contribution share for a Chinese partner is most often a minimum of 25%.
Thus, on the basis of each investment project submitted to Chinese authorities for their formal approval, their officers will precise the conditions to meet so as to allow the registration of a sino-foreign joint venture. They are :
- the proportion of minimum or maximum shares allowed (majority or minority JV)
- the minimum amount of capital (subject to approval before registration and obtaining a business license)
- the review of an authorized scope of permitted activities + possible limitations
- other specific operating conditions (qualification of personnel, minimum number of employees, etc).
4. key considerations before engaging in a JV partnership
If the prospective of setting up with a Chinese partner suggests an easier and more cost effective market entry, other matter should be taken into consideration before going for a joint venture in China. Few key points :
The responsibilities and liability of each party. If this looks like a basic element to include in a cooperation agreement, it is necessary to ensure a matching vision with the distribution of tasks for each party.
Is your chosen partner a person with whom you had successful business relationship in another context ? a former supplier, distributor or employee for example. Will he or she have the personal and professional ability to assume new responsibilities ?
- Could the business interests of each partner remain consistent within at least 5 years ?
- How can every party bring its capital contribution to the JV ? in cash ? in know-how or patents ? with what constraints, risks and cost ?
- What are the risks for any possible technology transfer ? what acceptable level of intellectual or industrial property can be provided to the China JV ?
- Upon what criteria both parties may decide to reinvest the profits or rather to distribute profit ?
- What are the JV exit options in the event the partnership should stop ? What is the potential nuisance capacity of a partner who may tomorrow become a competitor ?
5. Which qualified Chinese partner for what joint-venture project ?
Whether your Chinese partner is a natural person, a well-established private company or a State Owned Corporation, the good balance of relation may be difficult to keep over time.
There are sectors of activity in which only a Chinese company licensed in a particular field of activity would be an qualified and authorized JV partner for your project. For example, the financial services, banking, sensitive industries, automotive production must have qualified & licensed Chinese partners. For other sectors, it may the (almost) monopolistic position of a Chinese company, its presence or its network vis-à-vis some targeted market that makes the association project relevant. This may concern the sectors of media advertising, agricultural projects, wine production, or manufacturing of highly regulated products. Still, although considered sensitive from a regulatory point of view, the activities involving food production or distribution, sale of alcohol or pharmaceuticals, drugs and medical devices do not require a mandatory local partner.
For smaller projects where it is rather the relationship between two individuals that prevails, it may be necessary to ensure the targeted business sector does not require further qualifications, guarantees, permit or a special corporate status from the Chinese side.
6. Sharing our experience of establishing China joint-ventures
Based on our past business registration experience and depending on the nature of your project, we may have further insight to share with you :
- The reasons for considering a joint venture in China and success stories.
- The reasons to doubt about a Chinese joint venture and examples of failures.
- The conditions and steps to register a joint venture, upon sector regulations.
- The incorporation formalities and deadlines for the project as a whole.
- The capital level to consider, accounting, tax and reporting matter, customs considerations
- The draft of a proper cooperation contract, Articles of Association and shareholders agreement.
Do you represent a company that plans to set-up a joint venture in China ?
Already in discussion with a targeted partner to (re)negotiate the terms of cooperation ?
Do you simply wonder about the legal and regulatory environment to consider for your investment project in China ?
Need assistance with auditing a JV partner?
7. Hiring foreign employees in a joint venture
A sino-foreign joint venture has the legal personality. As such, it can be the domestic entity qualified to apply and obtain a working visa for its resident foreign employees.
8. Recommendations before establish a joint venture in China
- Check the Chinese negative List of foreign investments mentioned above.
This list does not give the specific conditions possibly required for some investments to be finally authorized. These conditions may also change according to cities (and districts). A first recommendation for optimization : conducting a preliminary set-up report to identify and compare the up-to-date requirements. Pre-negotiate with the authorities for the basic items : minimum registered capital, capital contribution schedule, taxation level and corporate tax status, availability of specific premises, customs zones status, tax treatment, effective conditions to enjoy VAT refunds for China manufactured products exported overseas.
The review for approval for investment applications is, except in special cases, handled by local administrations. They will treat your application according to their own development priorities and preferences. This explains why some requirement and conditions are simply not standardized at a national level. Luckily, the competition between investment parks and industrial zones is quite fierce to attract foreign investment. You can expect to benefit some incentives if prior negotiations have been successfully conducted.
The complete JV registration file requires the preparation and drafting of a formal feasibility report. It will carefully be reviewed by the approval authorities in charge. They will also regularly control the conducted activities match the approved content of the Business Scope listed in its business license.
The recommended pre-setup survey also includes the analysis of possible requirements for products certification and an overall compliance to the Chinese applicable standards.
Finally, for some projects, it is useful to conduct first a broader analysis such as a market research
to understand the local offer or a competition screening.