1. Between an equity joint venture and a cooperative joint venture:
An equity joint venture is registered in the PRC as a separate legal entity, whereas a cooperative joint venture may not necessarily be so, depending on whether it is a "true" cooperative venture or a "hybrid" cooperative venture. In an equity joint venture, the investors' capital contributions, in cash or in kind, must be capable of being expressed in monetary terms, and the risks, profits and number of appointments to the board of directors are all in proportion to the parties' capital contribution ratios. In a cooperative joint venture, whether "true" or "hybrid", the contributions of the investors need not be broken down and the risks and profits need not be shared strictly in accordance with the capital contribution ratios. Further an equity joint venture enjoys limited liability, whereas the position is not entirely clear with respect to a cooperative joint venture.
There is no ceiling stipulated in the relevant legislation as to the ratio of the foreign ownership in either forms of joint venture, but equity joint ventures require a minimum capital input from the foreign party of at least 25% of the venture's registered capital. In both cases capital contributions may be in cash or in kind (including intangible rights such as intellectual property) but intellectual property rights must not constitute more than 20% of the joint venture's registered capital regardless of what kind of joint venture it is. There are detailed rules on the valuation of contributions in-kind, and the parties are required to employ a state-approved valuation agency to value the land or contributions in-kind.
Foreign investors often prefer to invest in a cooperative joint venture largely because this form of venture is less regulated by legislation than the equity joint venture. For instance, the form of investment and risk/profit sharing is more flexible with a cooperative joint venture, and will be determined largely by the parties in the joint venture contract. With an equity joint venture, as mentioned above, the form of capital contribution and profit sharing is strictly defined by law in terms of the parties' relative capital contributions. A cooperative joint venture also affords greater flexibility to the management of the enterprise, as this is also less regulated by legislation.
The term of the joint venture will usually be fixed by the parties, generally between 10 to 30 years, although a fixed duration is not necessary - only in certain industries must joint ventures have a definite term.
The tax position of the two forms of joint venture is the same.
2. Between a joint venture and a WFOE:
To establish a WFOE in the PRC, the foreign investor must comply with at least one of the following conditions:-
(1) adopt advanced technology and equipment, engage in the development of new products, economise on the use of energy and raw materials, achieve product upgrading and replacement or produce import substitutes; or
(2) have annual exports amounting to at least 50% of the value of its total production output for the year.
In addition, the legislation prohibits a WFOE from operating in certain industries, including "domestic commerce". The term domestic commerce is not defined, although this is usually understood to involve importing into the domestic market or carrying out retailing or wholesaling activities.
The tax position of a WFOE is similar to that of a joint venture.
3. Between a joint venture and a representative office:
There are numerous restrictions against the conduct of business activities through a representative office (see article "Representative Offices"). These restrictions although not always enforced ensure that the role which representative offices are supposed to play is mainly limited to liaison between Chinese customers and the foreign company's head-office or between Chinese customers and the foreign company's network of joint ventures.
4. A Summary of The Various Types of Foreign Investment Enterprise
Three Types of Foreign Investment Enterprises
Equity Cooperative Wholly Foreign Joint Joint Owned Venture Venture Enterprise Contract Yes Yes No Articles of Yes Yes Yes association Standards for Advanced Export orientated Must benefit investment technology, and advanced development scientific technology of Chinese management, encouraged economy, technical utilise renovation of advanced enterprises, technology improved and equipment economic or export all, results, or most of expanded their products exports, Certain training of industries technical and excluded managerial personnel MOFTEC Approval Yes Yes Yes Project proposal Yes Depends Yes Feasibility study Yes Depends Yes SAIC registration Yes Dependant on Yes creation of legal personality Capital Cash, Cash, kind, Cash, contribution capital goods, industrial machinery, industrial property rights, equipment, property rights, land use industrial know-how, rights, property land use rights property rights, land use rights non-patented proprietary technology technology Board of Required. Requirement Yes directors Membership not depends on necessarily in structure of proportion to venture investment Separate Yes Requirement Yes management depends on structure structure of venture Domestic sales Possible. Possible. Possible. Export ratio Export ratio Exports normal normal must be at least 50% of annual output Accounting Accounting Books of account Accounting as as separate must be separate entity required established entity required Profit In proportion May be determined To foreign distribution to investment. by contract. investor. May be repat- Foreigners may May be repat- riated after tax use profits riated after distributed to tax reduce investment. May be repat- riated after tax Tax Income Tax Income Tax Income Tax Investment term Maximum normally As stipulated To be set 30 years, but by contract in application may be up to 50 years or unlimited in certain cases Early termination Permitted Permitted Permitted Governing law PRC law PRC law PRC law for JV Contract
Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.
