Establishing a joint venture (JV) in China requires a local partner according to the restrictions outlined in the People’s Republic of China Foreign Investment Industrial Guidance Catalogue.
The total investment of a Chinese JV is the capital required to kick-start the business until it becomes self-sufficient, and it’s made up of two components.
Registered Capital Portion:
This amount is fixed in the articles of association of a JV and constitutes an investment commitment on the part of the investors to the JV, subject to any increase or decrease of registered capital approved by the government.
The JV’s investors must pay 15 per cent of the registered capital of the JV within the first three months after issuance of the business license, with the balance due within the first two years. The minimum legal requirement is 30,000 RMB (CA$ 5,600) if the JV has two or more foreign investors, or 100,000 RMB (CA$18,800) if the JV only has one foreign investor. Authorities approve the amount of registered capital on a case-by-case basis, depending on business activities, scale of operation and location.
Non-Registered Capital Portion:
This is the amount of debt financing that the JV is permitted to obtain. Unlike registered capital, there is no commitment to finance the non-registered capital portion of a JV’s total investment.
There are two broadly defined forms of a JV by which Canadian companies can operate.
Equity Joint Venture
This is an enterprise where profits are distributed according to the ratio of contributions. A minimum of 25 per cent of the investment must come from a foreign partner.
An Equity Joint Venture (EVJ) is a limited liability company and holds an independent legal identity.
This type of entity must have a two-tiered management structure made of a board of directors and a management team.
Cooperative Joint Venture
This is an enterprise where profits are distributed between investors in a proportion that may differ from the proportionate ownership interest of each investor.
A Cooperative Joint Venture (CVJ) is a common model for a JV in which one company supplies land and labour, while the other supplies technology and capital. The level of investment may not be even between partners, but what each company brings to the partnership in terms of value is reflected in the profit sharing.
A CVJ can be structured as a limited liability company or a non-legal person, in which the liabilities flow through the investors. CVJs require the same two-tier structure as EVJs.
The process of setting up a JV in China takes between four and six months.
JVs in China require one individual of any nationality to act as a supervisor. The supervisor is to monitor the affairs of the JV and report problems to the board and investors.
Before you begin the application process, investors must lease office space to their future business. Include a clause in the lease voiding the contract without penalty if the JV application is rejected.
Office relocation requires a tax clearance declaration report (an audit).
It’s important to register any changes in the JV to the proper authorities. The documents registered by the authorities will be upheld in the event of a legal dispute—they need to be up-to-date.