Business Setting Upon China

Common Investment Vehicles in China:

a) Representative Office ("RO")

b) Wholly Foreign-Owned Enterprises ("WOFE")

c) Equity Joint Ventures ("EJV")

d) Cooperative Joint Ventures ("CJV")

a) Representative Office ("RO")

i) The most common form of foreign business presence in China is the Resident Representative Office ("RO"). A China RO provides a permanent base from which its resident personnel may conduct local sales and purchasing activities. It is desirable, a foreign company to establish a RO to do the followings in China:

  - Open an office with company signage,

  - Print company business cards showing local contact details,

  - Open bank accounts

  - Import office equipment and supplies,

  - Import personal effects of resident company representatives, and

  - Employing Chinese employees.

ii) ROs are not allowed to engage in "direct business operations" and violations may results in fines and closure of office. There is no precise definition of "direct business operations". However it is clear that the RO may not directly enter into contracts for profits nor it can directly invest in PRC withdraw of making profits.

b) Wholly Foreign-Owned Enterprises ("WFOE")

  • Industries Permitted
  • Since China entered WTO, previous requirements that a WFOE must be a high-technology or export-oriented production enterprise have now been relaxed. WFOEs are now permitted in a broader range of categories. In case of PRC laws and regulations specifically refers to requirement of a joint venture, then WFOEs will not be possible.

  • Parties Involved
  • The foreign investor in a WFOE does not need to negotiate with a

    Chinese enterprise in relation to the detailed terms and conditions in the case of a EJV or CJV. Therefore a WFOE will be easier to establish and to exit.

  • Operation and Management
  • The responsibility for daily operation of a WFOE lies soly with its own management, financial reports must be filed regularly with the PRC tax and financial authorities.

EJV is the most common foreign investment vehicles in China.

  • Legal Form
  • EJVs are limited liability legal person entities. The concept of limited liability now appears to be both settled and respected in China and conforms substantially to international custom and practice.

  • Capital Contributions
  • Capital contributions to EJV (referred to as the "registered capital") must be made in cash, patented and unpatented technology, materials and equipment and other property rights. Recent news that the China rules allow foreign parties to make capital contribution from proceeds of investments from FIEs previously invested in. The investors must share the profits and bear the losses of the EJV in proportion to their respective equity contribution percentages. The ratio of debt equity and the timing of equity contributions must conform to the applicable PRC legal requirements.

  • Management and Operation
  • An EJV functions substantially as a corporation in Western jurisdictions, with a board of directors and a general management office operating under the supervision and direction of the board. However, an EJV also shares many characteristics of a partnership in that the directions are appointed by the parties in general proportion to the investors' respective equity shares. There is no concept of a shareholders meeting in an EJV (or any FIE) with power being concentrated at the board level. Also equity interests can be transferred only with the consent of the other investors, and certain other fundamental activities require unanimous Board resolutions to be validly executed.

d) Cooperative Joint Ventures ("CJV")

  • i) Forms of Cooperative Joint Ventures
  • There are two forms of CJV:

    1) "True CJV" – does not involve creation of a legal person. Each party is responsible for making its own contributions to the venture, paying its own taxes on profit derived from the venture and bearing its own liability for risks and losses.

    2) "Legal person CJV" – a separate business entity is established and the parties' liability is limited to their capital contributions. This is more prevalent for today and below is a discussion of the legal person CJV.

  • Parties' Investments
  • CJV instead of or in additional to contributing to the registered capital, may provide "cooperative conditions" including access to or use of certain assets and/or rights which will promote the business prospects of the CJV. In most cases, the China party provides non-equity "cooperative conditions" in exchange for an agreed share of the profits, while the foreign party contributes most or all of the true register capital in cash or other permitted in-kind contributions.

  • Distribution of Profits
  • CJV will distribute profits not rigidly conform with parties' capital contribution ratios. CJVs are more flexible than EJV that profits sharing not necessarily tied to value of their contributions. CJVs also allow distribution of dividend in kind as well as cash.

  • Management and Operation
  • CJV must have either a board of directors or a joint management office. In practice, "legal person" CJVs typically adopt the board of directors model. The CJV law permits the management of CJV to be delegated to a third party with government approval. This arrangement is the standard model of operation fin the hotel industry but also applicable in other industries.

  • Recoupment of Investment
  • Subject to approval, foreign party may recoup its equity investment prior to expiration of terms provided that if the foreign party has already recovered its investment, all the fix assets of the joint venture will revert to the Chinese party upon termination of the CJV.