How to establish an equity joint venture in China?

Equity joint ventures are the second most common manner in which foreign companies enter the domestic market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned. Joint ventures are usually established to exploit 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 operations of a joint venture are limited to a fixed period, from thirty to fifty years. In some cases an unlimited period of operations 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 nonnegotiable and cannot be transferred without approval from the Chinese government. Investors are restricted from withdrawing registered capital during the life 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 could 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. Foreign partner(s) must contribute at least 25% to the joint venture. There is no minimum investment for Chinese partner (s).

Foreign exchange accounts should be balanced to remit profits abroad so repatriated foreign exchange can be offset by exports from the joint venture. With elimination of foreign exchange certificates, the requirement is getting 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. Where sum of the debt and equity is more than US $10 million but less than US $30 million, 40% of total investment must be in equity. When 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 landuse rights but cannot include labor. The value of equipment, materials, intellectual property rights, or landuse rights must receive approval by government authorities before joint ventures 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 interference from government employment industries, as long as they abide by Chinese labor laws. Joint ventures can purchase land and build their own facilities, privileges that are not allowed to representative offices.