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How to Set Up a Joint Venture Company in China

Chi­na is one of the largest and fastest-grow­ing mar­kets in the world, offer­ing many oppor­tu­ni­ties for for­eign investors who want to tap into its poten­tial. How­ev­er, doing busi­ness in Chi­na can also be chal­leng­ing, as it involves nav­i­gat­ing dif­fer­ent legal, reg­u­la­to­ry, cul­tur­al and lin­guis­tic bar­ri­ers. One of the ways to over­come these chal­lenges is to form a joint ven­ture (JV) com­pa­ny with a Chi­nese part­ner. A JV is a type of busi­ness enti­ty that allows two or more par­ties to share own­er­ship, man­age­ment, prof­its and risks of a busi­ness oper­a­tion in China.

In this arti­cle, we will explain what a JV is, what are its advan­tages and dis­ad­van­tages, what are the steps to set up a JV com­pa­ny in Chi­na, and what are some best prac­tices to fol­low. We will also answer some fre­quent­ly asked ques­tions about JVs in China.

What is a Joint Venture Company?

A joint ven­ture com­pa­ny is a form of for­eign direct invest­ment (FDI) that allows for­eign investors to col­lab­o­rate with Chi­nese com­pa­nies or indi­vid­u­als to estab­lish and oper­ate a busi­ness enti­ty in Chi­na. A JV can be either an equi­ty joint ven­ture (EJV) or a coöper­a­tive joint ven­ture (CJV).

An EJV is a lim­it­ed lia­bil­i­ty com­pa­ny (LLC) that is joint­ly owned by the for­eign and Chi­nese par­ties accord­ing to their respec­tive cap­i­tal con­tri­bu­tions. The prof­its and loss­es of an EJV are dis­trib­uted accord­ing to the pro­por­tion of equi­ty held by each par­ty. An EJV must have at least two share­hold­ers, one of which must be a Chi­nese legal per­son or nat­ur­al person.

A CJV is a more flex­i­ble form of JV that can be either an LLC or a non-legal per­son enti­ty, depend­ing on the agree­ment between the par­ties. The own­er­ship, man­age­ment, prof­its and risks of a CJV are deter­mined by the con­tract between the par­ties, rather than by their cap­i­tal con­tri­bu­tions. A CJV can have dif­fer­ent forms of coöper­a­tion, such as prof­it-shar­ing, asset-shar­ing or project-based arrangements.

What are the Advantages and Disadvantages of a JV Company?

A JV com­pa­ny has both advan­tages and dis­ad­van­tages for for­eign investors who want to do busi­ness in Chi­na. Some of the main advan­tages are:

• Access to local resources: A JV can help for­eign investors gain access to local resources, such as mar­ket knowl­edge, cus­tomer base, dis­tri­b­u­tion chan­nels, sup­pli­ers, tal­ent and technology.
• Risk shar­ing: A JV can help for­eign investors share the risks and costs of doing busi­ness in Chi­na with their Chi­nese part­ners, espe­cial­ly in uncer­tain or com­pet­i­tive markets.
• Reg­u­la­to­ry com­pli­ance: A JV can help for­eign investors com­ply with the Chi­nese laws and reg­u­la­tions that apply to their indus­try or sec­tor, such as obtain­ing licens­es, per­mits or approvals.
• Gov­ern­ment sup­port: A JV can help for­eign investors ben­e­fit from the gov­ern­ment poli­cies and incen­tives that sup­port cer­tain indus­tries or regions in Chi­na, such as pref­er­en­tial tax rates, sub­si­dies or grants.

Some of the main dis­ad­van­tages are:

• Loss of con­trol: A JV can lim­it the con­trol and auton­o­my of for­eign investors over their busi­ness oper­a­tions in Chi­na, as they have to share deci­sion-mak­ing pow­er and man­age­ment rights with their Chi­nese partners.
• Con­flict of inter­est: A JV can cre­ate poten­tial con­flicts of inter­est between the for­eign and Chi­nese par­ties, espe­cial­ly if they have dif­fer­ent goals, expec­ta­tions or cultures.
• Lack of trans­paren­cy: A JV can expose for­eign investors to the risk of fraud, cor­rup­tion or mis­man­age­ment by their Chi­nese part­ners, espe­cial­ly if there is a lack of trans­paren­cy and account­abil­i­ty in the JV’s finan­cial and oper­a­tional performance.
• Exit dif­fi­cul­ty: A JV can make it dif­fi­cult for for­eign investors to exit or ter­mi­nate their busi­ness rela­tion­ship with their Chi­nese part­ners, espe­cial­ly if there is no clear exit clause or dis­pute res­o­lu­tion mech­a­nism in the JV contract.

What are the Steps to Set Up a JV Company in China?

The steps to set up a JV com­pa­ny in Chi­na vary depend­ing on the type and nature of the JV, but gen­er­al­ly involve the fol­low­ing stages:

Stage 1: Preparatory Work

The first stage involves con­duct­ing mar­ket research, find­ing a suit­able Chi­nese part­ner, nego­ti­at­ing the terms of coöper­a­tion, draft­ing the JV con­tract and fea­si­bil­i­ty study report, and obtain­ing pre­lim­i­nary approval from the rel­e­vant authorities.

Stage 2: Registration Work

The sec­ond stage involves reg­is­ter­ing the JV com­pa­ny with the local admin­is­tra­tion for mar­ket reg­u­la­tion (AMR), obtain­ing the busi­ness license, open­ing a bank account, and com­plet­ing oth­er reg­is­tra­tion for­mal­i­ties with the tax, cus­toms, for­eign exchange, social secu­ri­ty and oth­er departments.

Stage 3: Post-Registration Work

The third stage involves inject­ing cap­i­tal, hir­ing staff, obtain­ing per­mits or licens­es for spe­cif­ic busi­ness activ­i­ties, and start­ing the busi­ness operation.

What are Some Best Practices to Follow When Setting Up a JV Company in China?

Set­ting up a JV com­pa­ny in Chi­na can be a com­plex and lengthy process that requires care­ful plan­ning and exe­cu­tion. Here are some best prac­tices to fol­low when set­ting up a JV com­pa­ny in China:

• Con­duct due dili­gence: Before enter­ing into a JV agree­ment, for­eign investors should con­duct thor­ough due dili­gence on their poten­tial Chi­nese part­ners, includ­ing their back­ground, rep­u­ta­tion, finan­cial sta­tus, legal com­pli­ance, busi­ness per­for­mance and compatibility.
• Choose the right JV type: For­eign investors should choose the type of JV that best suits their busi­ness objec­tives, risk appetite and indus­try require­ments. They should also con­sid­er the tax impli­ca­tions, legal pro­tec­tion and exit options of each JV type.
• Nego­ti­ate the JV con­tract: For­eign investors should nego­ti­ate the JV con­tract with their Chi­nese part­ners in a clear and com­pre­hen­sive man­ner, cov­er­ing all the key aspects of the coöper­a­tion, such as own­er­ship struc­ture, man­age­ment struc­ture, prof­it dis­tri­b­u­tion, cap­i­tal con­tri­bu­tion, scope of busi­ness, dis­pute res­o­lu­tion and exit mechanism.
• Seek pro­fes­sion­al advice: For­eign investors should seek pro­fes­sion­al advice from lawyers, accoun­tants, con­sul­tants and oth­er experts who are famil­iar with the Chi­nese mar­ket and legal sys­tem, espe­cial­ly when deal­ing with com­plex or sen­si­tive issues.
• Mon­i­tor the JV per­for­mance: For­eign investors should mon­i­tor the JV’s finan­cial and oper­a­tional per­for­mance reg­u­lar­ly, and com­mu­ni­cate with their Chi­nese part­ners fre­quent­ly to resolve any issues or prob­lems that may arise.

Frequently Asked Questions

Sources:

1. Min­istry of Com­merce | Notice on Improv­ing the For­eign Invest­ment Infor­ma­tion Report­ing System
2. The State Coun­cil | Reg­u­la­tions on the Admin­is­tra­tion of For­eign-fund­ed Enterprises
3. Chi​na​.org​.cn | Chi­na’s new for­eign invest­ment law to take effect on Jan. 1
4. Chi­na Dai­ly | New for­eign invest­ment law to boost confidence
5. Chi­nese Acad­e­my of Sci­ences | Chi­na’s For­eign Invest­ment Law: A New Era for For­eign Businesses