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Joint Ventures (JV) are one of the corporate structures available to foreign investors to invest in and have access to the Chinese market. This article introduces how to establish a joint venture in China, including basic requirements, procedures, and timeline.
Differently from WFOEs (Wholly Foreign-owned Entity) and Representative Offices, a joint venture involves at least one Chinese partner which can be either an individual or a corporate.
Although local partnerships are not needed for many sectors which are now open to foreign investment, China has a Negative List Approach against the previous Investment Catalogue, there are several reasons why a JV could still make sense.
In short, a Joint Venture is a limited liability company that is created through a partnership between a foreign-invested enterprise (FIE) and Chinese investors, who share the costs, rewards, and the management of the JV.
After the announcement of new Foreign Investment Law, which is effective on January 1st, 2020, previous distinctions between the Equity Joint Venture (EJV) and Cooperative Joint Venture (CJV) have been abolished.
Existing JVs incorporated before the discussion and implementation of the Foreign Investment Law now have a five-year transition period to proceed with the changes required in their current corporate structure.
The incorporation process of a JV normally takes 5 to 6 months as it can be a complex corporate vehicle.
Before moving forward, it is important to determine if the foreign company is qualified to create a JV under China’s Negative List.
Serving as an entry guide for foreign investors in China, the Negative List refers to a comprehensive manual outlining certain areas where foreign investment and businesses are prohibited or restricted.
For industries listed under “restricted” terms, foreign companies are still allowed to invest in China but must meet specific conditions such as limit equity ratio and remaining shareholding under 51%.
Though there is no minimum registered capital required, the proportion of the investment contributed by the foreign investors shall generally not be less than 25% of the registered capital of the company.
For the Service industry, it should be no less than USD 100,000, and the manufacturing industry is no less than USD 150,000.
To find a qualified and reliable partner, rigorous research and due diligence on all aspects should be conducted in advance.
The first step for foreign investors is drawing up a list of one or more potential Chinese partners, listing the pros and cons of each case, and then go through independent due diligence to at least ensure the legal capacity and financial position of the partner.
The ideal partner will simply be the one whose resources, skills, and assets are complementary to the needs of the masterplan for the Chinese market.
Once the partners are chosen, several documents need to be drafted or obtained, including the following:
1. Letter of Intent
After the foreign and Chinese counterparts reach an agreement on establishing a joint venture together, a letter of intent (LOI) should be drafted. The LOI is a non-binding document and normally states the prerequisites and conditions of co-operation in the Chinese market.
2. Project Proposal
Following the letter of intent, the Chinese partner is responsible for the preparation of the project proposal. The project proposal should contain the overall assumptions of the structure in which both sides will be stated as investors.
3. Feasibility Study
When receiving the approval of the project proposal, a feasibility study shall be prepared by both parties. As an indispensable step before investment decisions and a basis for further work, it analyzes the viability of the idea and meanwhile it gives a reality check to the future cooperation between the two or more investors.
4. Name approval of the JV
The local Administration of Industry and Commerce (AIC) in the municipality which is responsible for the registered address of JVs normally requires a list of potential company names to be submitted and holds the final say in whether one of those names is approved or not. JVs should apply for the name registration within 30 days upon receiving the approval of the project proposal.
5. JV Contract & Articles of Association
The purpose of a JV contract and Articles of Association is to lay down the principles of the organization, its methods of operation, and management rules or principles to be adopted. Both documents need to be in written forms and must be signed by all partners.
6. Leasing Contract of the JV
While preparing the incorporation steps, investors need to select a leased office space for future business operations and to domiciliate the corporate entity. The need for a registered address and the assignment of entities to commercial or industrial locations depends on the specific business and industry that the JV will target.
7. Certificate of approval of the JV
Once the above documents are ready and accepted by the AIC, the Municipal Commission of Commerce (MOC) will issue a formal approval letter in favor of the Joint Venture incorporation assigning the entity an enterprise code. An approval certificate is usually issued within 10 days, closing the first phase of the incorporation process.
Upon receiving a certificate of approval for the establishment of a JV from the MOC, investors need to apply for a business license at the AIC within 30 days.
Once the business license is issued, the Joint Venture is legally established together with all the company information presented in the previous steps.
A successful Joint Venture can bring valuable opportunities to its business partners but still can be risky, especially for companies that do not have a strong relationship or a professional knowledge of the potential partner as well as the Chinese market and business customs in general.
Foreign investors are highly recommended to engage professionals’ advice from legal and financial perspectives before starting to negotiate the incorporation of a JV.
Hawksford is an established provider of company registration and outsourced corporate services in China. With 100 multilingual professionals based in Shanghai, Beijing, Suzhou, Guangzhou and Shenzhen, we are able to offer the very best local knowledge to our international clients.
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