China: Joint Venture

On this Page:

- China: Nature of a Joint Venture
- China: Formation of a Joint Venture
- China: Ongoing Formalities for a Joint Venture
- China: Employing Staff for a Joint Venture
- China: Taxation of a Joint Venture

China: Nature of a Joint Venture (JV)

Joint Ventures used to be the most widely used business form for a foreign company making a business investment in China, but they have largely been superseded by the Wholly Foreign-Owned Enterprise, particularly since company law was extensively revised in 2006. Many companies in fact experienced problems with Joint Ventures due to legal uncertainties and failure to understand Chinese business culture. Although the Joint Venture form seems to be fading out, it still has its uses, particularly perhaps when dealing with a large Chinese state organization.

Originally, Joint Ventures were seen by the Chinese themselves as being a vehicle for generating exports, and as a means of encouraging high technology manufacturing. The first JV law was framed in those terms; but as time went by JVs became used for much wider purposes.

There are two types of JV: Equity Joint Ventures and Cooperative Joint Ventures. The former is always structured as a limited company and the parties may be individuals or corporates; profits are shared in proportion to the capital contributions of the partners. The latter may be structured as a limited company or more rarely may be a partnership in which the partners have unlimited liability. In a Cooperative Partnership profits can be distributed in any way that may be agreed between the partners.

The original law governing Joint Ventures, which has been amended a number of times since, is The Law of the PRC on Joint Venture Using Chinese and Foreign Investment, 1979. There are also numerous sets of detailed regulations.

Joint Ventures are usually set up to last from 30 to 50 years, but can be unlimited in duration. As is the case with other business forms, the capital required for a Joint Venture must be established at the outset. At least 25% of the agreed capital must be provided by the foreign partner. Once paid in, the capital cannot be repaid during the life of the partnership. Originally, share structures set up for a Joint Venture were highly inflexible, but over time the regulations have become somewhat more accommodating.

Capital can take the form either of cash or can be represented by business assets, including intellectual property. Equity must represent a minimum proportion of the financing of a Joint Venture, ranging from 33% to 70% depending on size; the remainder can be debt. There is a minimum of three directors in a JV, with at least one director being appointed by each party.

The problems experienced by Western investors with the Joint Venture form have often resulted from failure to understand the structure of power within a Chinese limited liability company: it is not enough to have a majority of the shares in order to control operations, it is also necessary to control the two key management positions of General Manager and (Representative) Director, and also to have physical possession of the Chop. Of course, for an absentee investor, it is convenient to allow Chinese staff to run the business, but that may be fatal in the event of dissension.

Naturally, a Chinese partner is going to be reluctant to allow the Western partner to have total control of the business, and it is this factor which has increasingly come to be seen as a fundamental flaw in the concept of the Joint Venture.

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China: Formation of a Joint Venture

Initial approval for formation of a Joint Venture in China must be obtained from MOFTEC (The Ministry of Foreign Trade and Economic Cooperation) or one of its regional branch offices, based on a proposal by the prospective partners. MOFTEC is required to give an answer to a proposal within three months. If the proposal is approved, MOFTEC issues an Approval Certificate for Enterprises with Foreign Investment, following which the remaining stages of business formation are conducted through the local Administration of Industry and Commerce (AIC).

With the difference of this division of the approval process into two stages, if a Joint Venture is going to be formed on the basis of a limited company, the formation procedures and documentation requirements are similar to those required for a Wholly Foreign-Owned Enterprise, described here.

If the JV is to be formed on the basis of a partnership (with unlimited liability for the partners), approval by MOFTEC is still required, and the business must still be registered with the AIC, but more attention will fall upon the contract between the partners which will govern most aspects of the running of the business, since there will be no formal articles of association.