| Shenzhen is one of the best choices for doing | | | | "total investment", on the other hand, includes both |
| business in China. Situated in the Pearl River Delta, | | | | registered capital and external borrowings. |
| Shenzhen is the first Special Economic Zone since | | | | (B) Pursuant to regulations promulgated by the SAIC, |
| China carried out reform and open-door policy 30 | | | | certain minimum equity requirements are imposed on |
| years ago. Shenzhen has an area of 1953 square | | | | joint ventures. These are: |
| km’s and a population of more than 10 million. | | | | Minimum Equity |
| Shenzhen is the best city both for living and working | | | | Total Investment |
| in China, as well as the fastest growing city in the | | | | (% of Total Investment) |
| world. In Shenzhen you can enjoy the sound | | | | <= US$3 Million |
| infrastructure and the intensive industrial chain for | | | | 70% |
| trading, manufacturing and value investment. Since | | | | US$3 - US$10 Million |
| Shenzhen is bordering Hong Kong, you can also take | | | | 50% or US$2.1 Million (whichever is higher) |
| great advantage and opportunity from the “one | | | | US$10 - 30 Million |
| country, two systems” policy. | | | | 40% or US$5 Million (whichever is higher) |
| | | | | >US$30 Million |
| Introduction of Joint Venture (JV) | | | | 33.3% or US$12 Million (whichever is higher) |
| A Joint Venture is a business arrangement in which | | | | PRC laws governing joint ventures require that the |
| the participants create a new business entity or | | | | foreign party contribute no less than 25% of the |
| official contractual relationship and share investment | | | | registered capital. |
| and operation expenses, management responsibilities, | | | | (C) The capital to be injected by the parties |
| and profits and losses. | | | | constituting their capital contribution may take a |
| The Chinese authorities encourage foreign investors | | | | variety of forms including cash, machinery, equipment |
| to use this form of company in order to obtain | | | | and intangible property, such as proprietary |
| exposure to advanced technology and new | | | | technology, trademarks and other industrial property |
| management skills. In return, foreign investors can | | | | rights. Pursuant to a circular promulgated by SAFE |
| enjoy low labour costs, low production costs and a | | | | and effective as of 1 April 2003, subject to SAFE's |
| potentially large Chinese market share. Joint Ventures | | | | approval, a foreign party may also use the assets |
| are sometimes the only way to register in China if a | | | | obtained by way of early recoupment of investment, |
| certain business activity is still controlled by the | | | | liquidation, share transferring, capital reduction etc. |
| government. e.g. Restaurants, Bars, Building and | | | | from FIEs it has previously invested in. In addition, |
| Construction, Car Production, Cosmetics etc. There | | | | the Chinese side may contribute the right to use a |
| are 2 types of Joint Venture: | | | | site and count this as part of its contribution. |
| 1- EJV (Equity Joint Venture) | | | | There are, however, certain restrictions on in kind |
| Equity joint ventures are the second most common | | | | contribution by a party. For example, the technology |
| manner in which foreign companies enter the China | | | | contributed as registered capital by a party generally |
| market and the preferred manner for cooperation | | | | should not exceed 20% of the total registered capital |
| where the Chinese government and Chinese | | | | (but this can be increased with approval for certain |
| businesses are concerned. Joint ventures are usually | | | | encouraged projects) or 50% of an individual |
| established to exploit the market knowledge, | | | | investor's capital contribution. The issue of the |
| preferential market treatment, and manufacturing | | | | appropriate valuation of in kind contribution can often |
| capability of the Chinese side along with the | | | | be a major stumbling block in joint venture |
| technology, manufacturing know-how, and marketing | | | | negotiations. |
| experience of the foreign partner. | | | | Once the joint venture contract is approved, the |
| Normally operation of a joint venture is limited to a | | | | parties must inject their subscribed registered capital |
| fixed period of time from thirty to fifty years. In | | | | amounts within the time limits set out in the contract. |
| some cases an unlimited period of operation can be | | | | If paid in one lump sum, the registered capital |
| approved, especially when the transfer of advanced | | | | contributions must be made within six (6) months of |
| technology is involved. Profit and risk sharing in a joint | | | | the issuance of the business license for the joint |
| venture are proportionate to the equity of each | | | | venture. If the subscribed registered capital is to be |
| partner in the joint venture, except in cases of a | | | | injected in instalments, the first instalments, which |
| breach of the joint venture contract. | | | | must not be less than 15% of the total subscribed |
| Share holdings in a joint venture are usually | | | | registered capital, must be made within three (3) |
| non-negotiable and cannot be transferred without | | | | months following issuance of the business license. |
| approval from the Chinese government. Investors | | | | The balance is to be contributed in accordance with a |
| are restricted from withdrawing registered capital | | | | schedule agreed by the parties, provided that the |
| during the live of the joint venture contract. | | | | parties must complete all such contributions within the |
| Regulations surrounding the transfer of shares with | | | | following time limits (calculated from date of issuance |
| only the approval of the board of directors and | | | | of the business license) depending on the total |
| without approval from government authorities will | | | | amount of registered capital of the joint venture |
| probably evolve over time as the size and number of | | | | company: |
| international joint ventures grow. | | | | Registered Capital (US$M) |
| There are specific requirements for the management | | | | Contribution Time Limit |
| structure of a joint venture but either party can hold | | | | <=0.5 |
| the position as chairman of the board of directors. A | | | | 1 year |
| minimum of 25% of the capital must be contributed | | | | >0.5 but <=1.0 |
| by the foreign partner(s). There is no minimum | | | | 1.5 years |
| investment for the Chinese partner(s). | | | | >1.0 but <=3.0 |
| It is preferable that foreign exchange accounts are | | | | 2 years |
| balanced in order to remit profits abroad so that the | | | | >3.0 but <=10.0 |
| repatriated foreign exchange is offset by exports | | | | 3 years |
| from the joint venture. With the elimination of foreign | | | | >10.0subject to approval with reference to actual |
| exchange certificates and the further opening of the | | | | condition |
| China market, this requirement is becoming more and | | | | (D) Chinese law permits joint ventures to borrow |
| more relaxed. | | | | funds from either Chinese or foreign banks in excess |
| The permissible debt to equity ratio of a joint | | | | of the parties' capital contributions. Shareholder loans |
| venture is regulated depending on the size of the | | | | from the foreign party are also permitted. (Chinese |
| joint venture. In situations where the sum of debt | | | | partners likely will not have a sufficiently broad scope |
| and equity is less than US$ 3 million, equity must | | | | of business to permit them to provide shareholders |
| constitute 70% of the total investment. In joint | | | | loans.) All such loans should be registered with SAFE |
| ventures where the sum of the debt and equity is | | | | and should not exceed the difference between the |
| more than US$ 3 million but less than US$ 10 million, | | | | registered capital amount and the total investment |
| equity must constitute at least half of the total | | | | amount. |
| investment. In cases where the sum of the debt and | | | | Transfers of Equity Interests in Joint Ventures |
| equity is more than US$ 10 million but less than US$ | | | | If a party proposes to transfer all or part of its |
| 30 million, 40% of the total investment must be in | | | | interest in the registered capital of the joint venture |
| the form of equity. When the total investment | | | | company to a third party, then each other party has |
| exceeds US$ 30 million, at least a third of the sum of | | | | a pre-emptive right to purchase the equity interest |
| the debt and equity must be equity. | | | | proposed to be transferred. As an equity transfer |
| Equity can include cash, buildings, equipment, | | | | also requires amendment of the joint venture |
| materials, intellectual property rights, and land-use | | | | contract and articles of association, which in turns |
| rights but cannot include labor. The value of any | | | | requires the signature of each party, each party in |
| equipment, materials, intellectual property rights, or | | | | effect holds absolute consent rights to any transfer |
| land-use rights must be approved by government | | | | generally. All transfers of registered capital additionally |
| authorities before the joint venture can be approved. | | | | require a unanimous approval of the joint venture |
| After a joint venture is registered, the entity is | | | | company board of directors and approval by the |
| considered a Chinese legal entity and must abide by | | | | original government authority which approved the |
| all Chinese laws. As a Chinese legal entity, a joint | | | | joint venture contract and articles of association. |
| venture is free to hire Chinese nationals without the | | | | Off-shore Structures |
| interference from government employment industries | | | | (A) Offshore Structures |
| as long as they abide by Chinese labor law. Joint | | | | The entity to be used by the foreign investor as the |
| ventures are also able to purchase land and build their | | | | offshore investment holding company ("OHC") for its |
| own buildings, privileges prevented to representative | | | | investment in the EJV will be determined by a |
| offices. | | | | number of factors. One of the main considerations |
| 2- CJV (Cooperative Joint Venture) | | | | driving choice of OHC is tax-efficiency. In this respect |
| In a Sino-Foreign Cooperative Venture (also known | | | | the foreign party needs to ascertain whether there is |
| as Contractual Joint Venture), the parties involved | | | | a double tax treaty ("DTT") covering the types of |
| may operate as separate legal entities and bear | | | | revenue streams that are likely to be coming out of |
| liabilities independently rather than as a single entity. A | | | | the EJV as between the PRC and the jurisdiction |
| cooperative venture may also be registered as a | | | | where the OHC is established. DTTs generally cover |
| limited liability entity resembling an equity joint | | | | loan interest, dividends and distributions, income |
| venture in operation, structure, and status as a | | | | taxes, royalties and capital gains. The tax treatment |
| Chinese legal entity. | | | | of dividends tend to be less important in terms of |
| There is no minimum foreign contribution required to | | | | determining the location of the OHC because, at |
| initiate a cooperative venture, allowing a foreign | | | | present, China exempts dividends by FIEs to their |
| company to take part in an enterprise where they | | | | foreign shareholders from withholding and other |
| preferred to remain a minor shareholder. The | | | | taxes (although this could change as the post-WTO |
| contributions made by the investors are not required | | | | levelling of the playing field progresses, as Chinese |
| to be expressed in a monetary value and can include | | | | parties do not benefit from such an exemption). |
| excluded in the equity joint venture process can be | | | | There are proprietary software programs for |
| contributed such as labor, resources, and services. | | | | determining the most tax-efficient jurisdiction under |
| Profits in a cooperative venture are divided according | | | | the applicable DTTs, based on a specific set of input |
| to the terms of the cooperative venture contract | | | | parameters which you provide. |
| rather than by investment share, allowing a more | | | | Based on past experience, popular DTTs for |
| flexible schedule for return on investment in cases | | | | investment in China are the PRC-Mauritius DTT (but |
| where one investor provides cash while the other | | | | note the provisions on capital gains do not apply to |
| party's investment is primarily in kind. | | | | FIEs whose principal assets comprise real estate |
| Greater flexibility in the structuring of a cooperative | | | | assets), PRC-Netherlands and PRC-Malaysia. If you |
| venture is also permissible including the structure of | | | | are using a Labuan company, note that certain |
| the organization, management, and assets. There is | | | | countries have objected to Labuan companies getting |
| no term for unlimited terms in cooperative ventures, | | | | Malaysian DTT benefits in the country of investment |
| but also no provisions for the term of the duration. | | | | because it is a tax haven within Malaysia, although |
| The term of the cooperative venture contract may | | | | China does not appear to have done so to date. |
| be renewed subject to the consent of the parties | | | | A number of industries in China, notably the |
| involved and approval from the examination and | | | | telecommunications, fund management, banking, |
| approval authorities. The foreign investor is permitted | | | | venture capital and many others require foreign |
| to withdraw their registered capital or a portion | | | | investors to meet certain qualification requirements |
| thereof from the cooperative venture during the | | | | which may preclude using a special purpose vehicle |
| duration of the cooperative venture contract. | | | | ("SPV") as the OHC. This needs to be considered on |
| Because of the unique privileges and added features | | | | an industry-by-industry, case by case basis. It may |
| offered to the foreign party in a cooperative | | | | be possible, in some cases, such as under the Foreign |
| venture, trade unions must be allowed to represent | | | | Invested Venture Investment Enterprise |
| the employees in employment matters to protect | | | | Administrative Regulations to use an affiliated entity |
| the interests of the employees. | | | | to satisfy the qualification requirements where there |
| KEY ISSUES REGARDING A JOINT VENTURE | | | | is an express legal basis for doing so, whilst investing |
| Nature of JV Project | | | | through an SPV located in a tax-efficient jurisdiction. |
| (A) The principal differences between an EJV and a | | | | Another possibility to consider, when establishing an |
| CJV can be simply summarised as follows: | | | | EJV in "special industries" with foreign investor |
| - For an EJV: | | | | qualification requirements, is whether the industry |
| 1. Each party must make cash or permitted | | | | regulator would accept the use of an SPV backed up |
| contributions in proportion to its subscribed | | | | by a parent company guarantee of the SPV's |
| percentage of the EJV's registered capital. | | | | obligations in relation to the EJV or similar |
| 2. Profit must be distributed strictly in accordance | | | | arrangement, based on an agreement negotiated |
| with the parties' respective percentage shareholding | | | | with the regulator. Again there are no hard and fast |
| of the registered capital of the EJV. | | | | rules as to what may or may not be possible as it |
| 3. Upon dissolution of the EJV at the expiry of the | | | | depends on the position taken by the regulator. You |
| term of operation, the EJV's net assets are to be | | | | should make telephone enquires to confirm. |
| distributed to each party in accordance with its | | | | Tax structuring of the foreign party's investment in |
| respective shareholding of the EJV's registered capital. | | | | an FIE does not, however, stop at the OHC level, as |
| - For a CJV: | | | | you also need to consider (where applicable) the tax |
| 1. A party (typically, but not always, the Chinese | | | | implications of repatriating funds from the OHC to |
| party) may contribute non-cash intangibles in the | | | | the foreign party's home jurisdiction, and the DTTs |
| form of "cooperative conditions". Such "cooperative | | | | (if any) between OHC jurisdiction and the foreign |
| conditions" may consist of market access rights, | | | | investor's home jurisdiction. |
| rights to use buildings or office space owned or | | | | (B) Tax Havens as OHCs |
| leased by the party that are not subject to clear | | | | Many foreign investors tend to favour the use of tax |
| valuation. In exchange for such "cooperative | | | | haven jurisdictions, typically the British Virgin Islands |
| conditions", the party is entitled to participate in the | | | | ("BVI"), the Cayman Islands and so forth as OHCs |
| distributable earnings of the CJV. | | | | for China investments. |
| 2. Profit sharing in a CJV need not be made strictly in | | | | From the foreign investor perspective the main |
| accordance with the parties' respective percentage | | | | advantage is low or zero rates of tax on funds once |
| shareholding of the registered capital of the CJV but | | | | they reach the tax haven or on disposals of shares in |
| can be made in accordance with the agreement of | | | | OHCs located in the tax haven. On the other hand, |
| the parties (e.g. the Chinese party may be entitled to | | | | tax havens do not have any DTTs to reduce the tax |
| a fixed profit share with the balance to be distributed | | | | withheld at the China end, so the tax required to be |
| to the foreign party, or the parties may agree on a | | | | withheld in China before a remittance of funds out by |
| multi-tiered profit-sharing arrangement that permits | | | | EJV (other than for dividends) by way of payment |
| the foreign party to recover an amount equal to its | | | | of loan interest, royalties etc. will be the maximum |
| capital investment on a priority basis, following which | | | | applicable rate under Chinese law and policy at the |
| the profit split will be changed, etc.). | | | | time, thus giving a substantially reduced amount on |
| 3. Upon dissolution of the CJV at the expiry of the | | | | arrival at the tax haven. |
| term of operation, the CJV's net assets may be | | | | The location of OHCs, as can be seen from the |
| transferred to the Chinese party without | | | | above, is not always straightforward and is a decision |
| compensation (thus operating in many respects as a | | | | that will be determined by a large number of |
| BOT project) so long as the foreign party has been | | | | variables on a case-by-case basis. Often foreign |
| able to recoup its capital contribution during the term | | | | investors will make the decision based on internal |
| of the CJV. Such recoupment typically is funded by | | | | policies or on the basis of advice from their own |
| excess cash flow generated by accelerated | | | | in-house or external tax advisers. |
| depreciation of the CJV's assets. Such arrangement | | | | Miscellaneous |
| requires approval of relevant finance and tax | | | | (A) Under PRC law, joint venture companies have a |
| authorities in China. Note that this capital recoupment | | | | fixed term of operation. Currently, the most common |
| is separate and distinct from possible priority rights to | | | | term of operation approved is fifty (50) years. This |
| receive after-tax net profit distributions as outlined in | | | | term can be extended with the consent of all parties |
| the bullet point above. | | | | and approval of the relevant government authorities. |
| Capitalisation of JV | | | | In some instances, particularly in BOT-like CJVs, the |
| (A) The concepts of authorised and issued capital are | | | | term of operation agreed by the Chinese party and |
| not used in connection with Sino-foreign joint | | | | approved by the relevant government authorities will |
| ventures. Instead, the concepts of "registered | | | | be much shorter. |
| capital" and "total investment" are employed. Under | | | | (B) Depending on the nature of the operations of the |
| applicable PRC law, registered capital is defined as the | | | | proposed joint venture company, certain additional |
| total amount of capital contributions subscribed to by | | | | government approvals, permits or licenses may be |
| the parties and registered with the Chinese | | | | required, e.g., sanitation certificates, environmental |
| authorities. Thus, the term "registered capital" refers | | | | permits, production approvals, export licenses, |
| to the parties' equity in the venture. The concept of | | | | value-added telecom services operating licenses, etc. |