1. Characteristics and forms of Joint Venture (JV) or joint venture in China
In China, Sino-foreign joint ventures designate companies with mixed capital between one or more foreign and Chinese investors. They are 1 of the 2 forms of companies with foreign capital that can be established in China, the other form designating companies with 100% owned foreign capital (called WOFE or WFOE).
The Chinese administration distinguishes two distinct types of JV:
Equity Joint Ventures (EJV): It is a model which involves the legal creation of a limited liability company, a model chosen by most industrial companies which have a sustainable activity. The distribution of profit is defined, by contract, according to the contributions of the parties.
2. Retrospective and presentation of joint ventures in China
After the economic opening of the 80s, the joint ventures were the only legal form allowed to welcome foreign investments in China.
The accession of China to the WTO in 2001 gradually allowed the set-up of companies with 100% foreign capital in many sectors, but not all. So, forming a JV with a Chinese partner remains to this day an option as some sectors considered sensitive or strategic remain opened to foreign investments only if they done as a sino-foreign a joint venture. To this day in 2020, some investment sectors are still forbidden under a WOFE (Wholly Owned Foreign Enterprise) status.
Until 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 This Catalog is no longer in force and replaced by a "Negative List" of foreign investments in China, the latest version of August 2019 is still the one in force.
The national directives give the global frame the perimeter of activities allowed to foreign investors, some Chinese provinces and industrial zones having a special status can authorize the investors to benefit from preferential investment conditions (facilities, tax refunds, special customs procedures, etc.).
As an example, the Chinese government is granting particular incentives to the foreign investors who develop projects in the western provinces (the least developed as Xinjiang, Ningxia, Gansu). Since about 10 years, special measures also encourage foreign investors to invest in highly technological, energy saving or green business fields.
3. Possible restrictions for foreign investors
Restrictions can - depending on the sector of activity - may result for example in:
- (very) high minimum capital for a given sector resulting in a high investment entry cost
- a maximum proportion of participation authorized for the foreign party which does not allow to be in majority (for example, maximum 49% for the foreign investor)
- For JV projects that allow the foreign party to become the majority, the minimum contribution share of the Chinese side is most often a minimum of 25%
Thus, and on the basis of each project submitted to it, the Chinese authorities specify the conditions making it possible to authorize the registration of a Sino-foreign Joint Venture:
· The proportion of minimum or maximum shares allowed (majority or minority JV)
· The minimum amount of capital (subject to approval, before legal licensing)
· The indications on the authorized perimeter of a Business Scope and possible limitations.
· Other specific operating conditions (qualification of personnel for example)
4. Few considerations before going for a partnership in JV
If the prospect of setting up in China with a Chinese partner suggests an easier and more cost effective entry into the Chinese market, other considerations should be taken into account before going for a joint venture in China. Few key points hereunder:
- The responsibilities and obligations of each party: if this aspect seems to be a basic element to include in a cooperation agreement it is first necessary to ensure a concordant vision with a - as exhaustive as possible - distribution of tasks for each of the parties.
- Is the prospective partner a person with whom you have already had business relationships in another context? (former supplier, distributor or employee for example) Will he have the personal and professional scope to assume his new responsibilities?
- Can the interests of each partner remain consistent under at least 5 years?
- How can each party proceeds to its contribution to JV capital? in cash? in know-how or patents? with what constraints and cost?
- What issues of technology transfer to consider? should you provide intellectual or industrial property at a safe level?
- What criteria decide to rather reinvest the profits than distribute dividends?
- What 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 Chinese partner for which JV project?
Whether your Chinese partner is a natural person or a well-established company (or State Owned Corporation), the good balance of relation may be difficult to keep.
There are sectors of activity in which only a Chinese company (legal person) involved in a particular sector of activity would be eligible to be a partner in the project (eg financial services, banking, sensitive industries, automobile production, etc). For other sectors, it is the (almost) monopolistic position of a Chinese company, its presence or its networks vis-à-vis some target market that makes the prospect of an association relevant (for example media/advertising, agricultural projects, viticulture, production of highly regulated products).
For smaller projects where it is rather the relationship between two individuals that prevails to consider a Joint-venture partnership, it is first be necessary to ensure the targeted sector does not require special qualification, guarantees or a special status from the Chinese side.
Based on our experience, we have further information based on the nature of a project and its target field. Our experience on the constitution of JV in China may help you with:
- Reasons for considering a joint venture in China and success stories.
- Reasons to doubt about a joint venture in China and examples of failures.
- The conditions and steps to register a joint venture, as regulated by business sector.
- The incorporation formalities and deadlines for the project as a whole.
- Capital levels to consider, accounting & tax + customs system
- The preparation of a JV contract and shareholder pact
Do you represent a company that plans to create or close a joint venture in China? Already in discussion with a potential partner to (re)negotiate terms of cooperation in China? Or do you simply wonder about the legal options to consider for your investment project in China?
7. Hiring foreign employees with a joint venture?
A joint-venture has the legal personality and can be the domestic employer helping obtain a working visa for resident foreign employees.
8. Recommendations before setting up a joint venture in China
- Kindly check the "Negative List" of foreign investments cited 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 the details, compare the requirements and pre-negotiate with the authorities (minimum capital, capital payment deadlines, taxation level & tax status, availability of specific premises, zones customs status, VAT treatment, effective conditions for recovering VAT if local manufactured products are exported from China)
The review for approval for investment applications is, except in special cases, handled by local administrations who will treat them according to their own development priorities and preferences. This means some requirement & conditions are not standardized at national level. Luckily, the competition between investment zones and cities is also fierce to attract foreign investment, and you can expect to get some incentives if prior negotiations are sucessfully conducted.
The set-up full registration file of a joint-venture requires the preparation and drafting of a feasibility report that will carefully be examined by the approval authorities in charge.They will regularly check your activities match the approved content of the Business Scope listed in its Business License4.
A set-up survey may also include the analysis of possible requirements on products certification and overall conformity to the Chinese standards.
Finally, for some projects, it may be useful to conduct first a broader analysis (market report, competition screening report or product positioning survey so as to confirm the content of your China offer)