Thursday, 11 June 2015

4 Major Types of Foreign Investment Set-up in China (1)

Before deciding how to establish a business in China, foreign investors must be aware of and define their long-term and medium-term objectives. There are various corporate set-up options available, such as equity joint ventures, cooperative joint ventures, wholly foreign-owned enterprises and representative offices.  Each form has its own legal requirements, benefits and advantages.  Below is a brief description of each one:
  • Equity joint venture (EJV) enterprises

These are enterprises established in China as a result of joint investment with foreign individuals, firms and/or Chinese economic organizations, based on the principle of equality and mutual benefit, and subject to approval by the Chinese government.

An EJV takes the form of a limited liability company with the status of a Chinese legal entity. It requires joint contributions of both parties in investment, operation, share of profits, risk and losses, in strict proportion to the amount of investment contributed by the respective parties. In general, the level of investment offered by the foreign investor should be at least 25 percent. Investment can be in the form of cash, real estate, industrial property, equipment and technology, but these types of investment need to count as different shares in the investment.

  •  Contractual joint venture enterprises (CJV - also known as cooperative joint ventures)

As for the EJV, CJVs are established in China as a result of joint investment or cooperation with foreign individuals, firms and/or Chinese economic organizations, based on the principle of equity and mutual benefit, and subject to approval by the Chinese government.

However, a CJV has more flexibility in terms of contractual freedom and structure; that is, profits and losses are distributed between the Chinese party and the foreign investor in accordance with specific contractual provisions, as opposed to their respective equity interests in the C JV.

Capital contributions to both EJV and CJV can be in cash or in kind, such as buildings, machinery, materials, and know-how. For a CJV, the parties can decide how the value of their contributions should be determined, whereas for an EJV, this evaluation process normally needs an independent third party to assess the “market price” of the contributions.

A CJV project usually involves the foreign partner providing most or all of the funds and technology as well as key machinery, whilst the Chinese partner contributes land, facilities, natural resources and perhaps a limited amount of funding.  However, China’s economic environment has changed. Land has become a rare resource and Chinese companies are not short of money; therefore nowadays forming a CJV has become far less popular. 

(To be continued...)

Through our China WFOE (offices in Shanghai, Beijing and Guangzhou), Primasia provides one-stop China set-up and supporting services, including payroll, tax, accounting and licence renewal. If you need further assistance, please contact US


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