Joint ventures Guide in China

This work was prepared by Pierluigi Damiano Lenge. This work is intended for general information purposes only and is not intended to provide, and should not be
used in lieu of professional advice. The publisher Lenge & Partners assumes no liability for readers’ use of the information herein and readers are encouraged to
seek professional assistance with regard to specific matters. Any conclusions or opinions are based on the specific facts and circumstances of a particular matter
and therefore may not apply in all instances.
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Joint Ventures Guide in China

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TABLE OF CONTENTS
Introduction
Motives to establish a Joint Venture in China:
A) Necessity of the Chinese Partner and difficulty of Due Diligence
B) Other motives to establish a Joint Venture in China. Different business culture
and different business goals
The level of foreign control in Sino-Foreign Joint Ventures
A) Limitation of risks through contractual precautions
B) Limitation of risks by limiting the Chinese management control
PRC Joint Ventures Legal Framework
Cooperative Joint Venture (CJV):
A) Cooperative Joint Venture without Chinese legal person status
B) The agreement and Contract of CJV
C) Investment, Capital Contributions and Registered Capital of CJV
D) Purchase of Materials and Marketing of Products
E) Profits and losses of CJV. Recovery of Investment and Distribution of Income
F) Management of CJV. Board of Directors, Joint Management Committee and
General Manager
G) Duration, Dissolution and Liquidation of CJV
Equity Joint Venture (EJV):
A) The Agreement and Contract of EJV
B) Investment, Capital Contributions and Registered Capital of EJV
C) Board of Directors and Management Office
D) Introduction of Technology
E) Right to the Use of Site and Its Fee
F) Purchasing and Selling
G) Duration, Dissolution and Liquidation of EJV
Differences between EJV and CJV

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Taxation of Joint Ventures:
A) Taxes
B) Financial Affairs and Accounting
C) Foreign Exchange Control
D) Off-shore Joint Ventures
Staff, Workers and Trade Unions in Sino-Foreign Joint Ventures
Settlement of Disputes in Sino-Foreign Joint Ventures

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Introduction
From a historical and political point of view, Sino-Foreign Joint Ventures
represent the essence of relations between China and the world as well as the
main business and corporate strategy responsible of the extraordinary economic
growth and success of Chinese enterprises, which started with the “Chinese
economic reform” and the great opening of the Asian giant to the world.
As is known, the Chinese economic reform refers to the program of
economic reforms known also as “Socialism with Chinese characteristics” in the
People’s Republic of China that was started in December 1978 by reformists
within the Communist Party of China, led by Deng Xiaoping.
Economic reforms have introduced market principles and were carried out
in two stages. The first stage, in the late 1970s and early 1980s, involved the
decollectivization of agriculture, the opening up of the country to foreign
investments, and permission for entrepreneurs to start businesses, even if the
main industries remained state-owned.
The second stage of reform, in the late 1980s and 1990s, involved the
privatization and contracting out of much state-owned industry and the lifting of
price controls, protectionist policies, and regulations, although state monopolies
in sectors such as banking and petroleum remained.
In this very long-term plan, by starting from zero, China had to restructure
and modernize all the sectors of industry, state-owned enterprises, management
of public companies and introducing in the legal system private domestic
companies, change corporate culture, choose what manufacturing, import and
export (just to mention few things to do).
Consequentially, China needed to make accessible its immense land to
foreign investments and let in the most advanced and efficient foreign enterprises
in order to acquire the necessary knowledge to achieve the ambitious goals of its

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reform (…The State shall encourage the establishment of export-oriented or
technologically advanced production-type co-operative enterprises…).
Ironically, among those necessary foreign investors to increase quality and
standards, especially in the heavy and high-tech industry, there were China’s
“best” enemies, USA and Japan.
So, if the underlying directive was learning “what and how to do” from its
enemies-future business partners-competitors, it was necessary for China finding
an investment vehicle that would have allowed foreigners and Chinese working
together under the strict control of the government.
China wanted to “learn” quickly and therefore it started to attract foreign
enterprises/investments by offering low labor and production costs, and by making
the vast domestic market just a honey trap because rapidly filled in by Chinese
products and services, and then, in few decades, starting to export its products
and conquer the international markets (…The State encourages cooperative joint
ventures to sell their products on international markets…).
As result, an obligatory equity joint venture with a Chinese state-owned
company as partner was the first and only investment vehicle available for foreign
investors to operate in China.
The introduction of joint ventures marks a turning point for China, especially
if we consider/remember that prior to 1979, the legal system of China did not
provide any mechanism for foreign investment, and the 1978 Constitution seemed
expressly to preclude such foreign investment insofar as it described the PRC as
“a socialist state of the dictatorship of the proletariat” in which the means of
production were under “socialist ownership by the whole people and socialist
collective ownership by the working people.”
This situation radically changed July 1, 1979, when the Fifth National
People’s Congress adopted the “Law of the People’s Republic of China on Joint
Ventures Using Chinese and Foreign Investment” (JV Law), and additionally, in

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1982, when the Chinese government amended the Chinese Constitution in order
to provide explicit constitutional protection to foreign direct investment in general,
and equity joint venture investment in particular.
But to be welcomed, these equity joint ventures established within China’s
territory had to and yet “must be able to promote the development of China’s
economy and the improvement of the science and technology for the benefit of
socialist modernization.”
Nowadays, China allows foreigners to establish two types of joint ventures,
“equity joint venture” and “cooperative joint ventures”, and in those businesses
qualified as restricted, an obligatory joint venture with a Chinese partner (usually
a state-owned enterprise) is still the only investment vehicle available for foreign
investors.
However, the original scenario of joint ventures in China has changed
substantially over the years. For example, many businesses that at the beginning
of the great opening could enjoy tax incentives or full tax exemptions because
they were considered innovative or fundamental to China’s growth, have now lost
those benefits. Materials and production costs, salaries and wages have
increased considerably. During the years, new investment vehicles have been
made available to foreign investors. Many foreign enterprises have suffered great
losses due to the Chinese partner or simply did not make the planned profits,
always because of the Chinese partner.
Thus, if the initial reasons for foreign investors to venture with a Chinese
partner were basically the compulsoriness of the law, “tempting” low labor and
production costs, tax incentives and friendly tax policies, and the “mirage” of a
boundless market, it is important to understand, nowadays, that these reasons
are disappearing and foreign enterprises have more safe alternatives, if a joint
venture is still a useful and profitable vehicle to operate in China.

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Motives to establish a joint venture in China
A) Necessity of the Chinese Partner and difficulty of Due Diligence
On the Chinese side, transfer of technology, better management skills and
techniques (without forgetting marketing and advertising strategies) are still the
same valid reasons to form a joint venture with a foreign partner, whilst finding the
right motives for foreigners requires a deeper analysis.
The labor and production costs as well as taxation and tax treatment are
not “very” convenient as in the past, and markets and consumers can be reached
through other strategies and business entities. In addition, joint venture is still the
vehicle that most exposes investors to the risk of losing their know-how and
investment.
Therefore, one of the first element to take into consideration to assess if a
joint venture is the “only” and “right path” for a foreign company in China, it is the
analysis and valuation of the “necessary presence” of a Chinese partner, which is
the crucial element that characterizes this type of investment vehicle.
In a joint venture, investors need to take into account that having a partner
means partner’s interference/power in company decisions and management.
Usually the advantage of having Chinese partners is the support they can
provide to foreign companies unfamiliar with doing business in China. Such
support may include obtaining government approvals, labor recruitment, sourcing
raw materials, acquiring land and production facilities, and obtaining access to
marketing and distribution channels.
But if a foreign company has enough resources and experience, may get
the same things through a wholly foreign-owned enterprise. In fact, an
experienced Chinese staff in a WFOE may offer a similar range of support to a
foreign investor as a Chinese partner in a JV.

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The problem arises when domestic sales are the main priority since
Chinese individuals may not guarantee the same level of support of a Chinese
company as partner.
In fact, regarding to domestic sales, a Chinese company already operating
is supposed to share (guarantee) its existing and established marketing and
distributions channels. In this way, the upfront investment risks of the foreign
investor are greatly reduced, particularly in all those business-to-business
transactions which are based on personal relationships that take time to be
developed.
Unfortunately, uncountable foreign investors have been greatly
disappointed when they realized later (too late) that the distribution channels and
all the contacts and connections introduced and shared by their Chinese joint
venture partners turn out to have been exaggerated or/and inefficient or inexistent.
Thus, it is clear that if a Chinese partner is deemed necessary, like in the
case of domestic sales, then foreign investors should conduct prior serious due
diligence investigations on their “necessary” Chinese partner.
The due diligence activities should not be finalized to ascertain only the
reliability of partner and its real business capabilities, but they should be extended
to all subjects involved in the business, by accurate investigative activities on the
most disparate areas and matters.
However, collecting accurate information is an hard task in China. The most
common problems encountered during due diligence investigations are poor
transparency and inadequate documentation. For example, many Chinese
companies keep two sets of books or maintain poor accounting records. They
have a high volume of off-book sales, failing to make a distinction between
corporate and personal funds. Usually their accounting records lack of an
understanding of basic accounting principles, and they are not able to provide a
satisfactory estimate of production capacity.

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Another difficult task for foreign investors is that of discovering all the
liabilities or any other lack of compliance with regulations that can be easily hidden
by Chinese companies. Investors must be sure that the Chinese partner has the
ownership of its asset, and that the partner is not hiding financial burdens such as
loans, debts and bad inventories.
Sometimes Chinese companies hide complicated debts and security
arrangements which involve a tangled web of connections with affiliated
companies. There are often human resource issues such as unpaid social security,
employee income taxes, labor contract clauses and labor disputes.
It is thus very important to closely coordinate the various due diligence
teams to ensure that any suspicious discoveries are properly followed up, in order
to avoid expensive mistakes.
Lastly, and in addition to due diligence and investigations on legal, financial
and commercial aspects, it is highly recommended to perform interviews with
suppliers, customers and even competitors in order to be sure about partner’s
trustworthiness, reliability and reputation.
B) Other motives to establish a joint venture in China. Different business
culture and different business goals
There are other reasons that lead foreign companies to choose joint
ventures as investment vehicle to operate in China, and usually a joint venture is
part of a complex global business and corporate strategy.
One of the most common of these cases is when the foreign company is
only interested in manufacturing or assembling some components and/or parts
enjoying a faster work and cheaper production costs.
Another reason may be the flexible nature of joint venture which allows to
limit the risks in volatile emerging markets. Sometimes, in fact, companies would
try to lunch new products and create its related market, or would engage in a

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touch-and-go business, but do not want to (or they cannot) afford expensive
failures.
A cooperative joint venture can also be an attractive investment vehicle for
foreigners who want a fast return of investment by gradually transfer control to
their Chinese partners. In this case, the foreign company sells its know-how and
IP asset to its partner starting from a dominant controlling position until it leaves
the JV or remains as minority shareholder.
Cooperative joint ventures which operate without a separate legal person
status may also be an interesting vehicle because certain taxes and fees can be
avoided. For example, this type of CJV does not have to pay taxes on the transfer
of title to the land from the Chinese partner to the CJV, or pay fees for the
purchase by the Chinese partner of title to the land in cases where the Chinese
partner’s title to the land is unclear.
Recently JVs are also used by foreign investors who prefer their Chinese
partners to receive fixed payments only. In this case, the Chinese partner remains
a silent minority shareholder and its participation is limited to the rent of business
licenses and assets to the foreign company.
Whatever the reason of a joint venture, it is important to be sure that the
goals and ways to achieve them coincide with those of the Chinese partner. In
fact, many joint ventures in China fail because the different business philosophies,
expectations and practices of the partners.
Sometimes, when foreign investors are trying to build a base in China, and
are willing to forego profits to build market share or reinvest profits into the venture,
the Chinese partners are, on the contrary, looking for quick cash to finance their
own expansion or pay off debts, as well as an outlet to dump excess workers. But
sometimes it is the Chinese partner that tries to place a new product or service
and build its related market for a long-term business, whilst the foreign partner is
in rush to “make money” and leave China soon with its cheap manufactured
product.

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It is easy to understand that when interests differ, conflict over strategies
and management can arise frequently, and often, the communication problems or
gap between the foreign and Chinese partners are due to the different direction
and scope that the partners are giving to the joint venture.
Foreign investors “must be aware” of these cultural and business
differences, since starting the negotiation phase, and make sure what precisely
their Chinese partners mean to do and how to do. Once the foreign partner is sure
of the “real” Chinese partner’s motives, it should bind them in a unequivocal way
in the joint venture contract.
The level of foreign control in Sino-Foreign Joint Ventures:
A) Limitation of risks through contractual precautions
Joint Ventures in China are notoriously difficult to manage successfully, and
the foreign investor’s level of control is a complicated and hard task.
However, if it is true that the anthology of sino-joint ventures is rich of cases
of failure due to the disloyalty of Chinese partners, it is also true that nowadays
foreign companies can avoid all the mistakes made during the years, and take the
necessary and effective precautions before engaging in a joint venture with a
Chinese partner.
First of all, it is important to always keep in mind that a joint venture, not
only a sino-foreign joint venture, is an investment vehicle which by its nature
carries the danger of turning a partner into a competitor.
This intrinsic problem/characteristic is more accentuated in China,
especially for some types of businesses and for some companies from specific
foreign countries (the stars and stripes eagle has been heavily injured many times
by the red dragon), and unfortunately it is true that Chinese motives are usually
more competitive than collaborative.
It is already been said that the motives that lead Chinese companies to form
a joint venture with a foreign partner are approximately the same as always.

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Chinese partners gain, in addition to the profits generated by the joint venture,
technology, know-how and new products or processes, and for Chinese, it is
almost natural, after having learned how to do something, get rid of the foreign
partner.
However, foreign companies may drastically reduce or prevent risks if they
turn all the necessary precautions into binding contractual rules.
A first important precaution is checking the “real and concrete” meaning of
the Chinese version of main joint venture’s documents such as the agreement,
articles of association and contract.
More precisely, the law allows foreign partners of a CJV to accompany a
foreign language version of the said documents, and in a EJV the foreign
language version has formally the same value of the Chinese language. In case
of conflicting contents between the different versions of the documents, the
examination and approval authority demands an amendment to them to correct
the conflicting contents.
However, even though the law seems to recognize equal validity to foreign
languages, the Chinese courts and judges will always give more weight, because
they have to, to the Chinese version. For this reason, it is highly recommended,
after the negotiation phase has been concluded, and parties have drafted the
main documents, before to submit them to examination and approval authority,
check the real and practical meaning of the Chinese version, and eventually re-
write the foreign versions as exact translation of the Chinese versions in order to
be sure of their effective equal validity in front of a court.
Another critical point is the careful and clear definition of the joint venture’s
products and markets. This definition must be reinforced by a non-compete
agreement during and after expiration of the joint venture. During the joint venture,
the foreign party should constantly control that the Chinese partner is respecting
the non-compete commitments, and in case of violations, take all the necessary
actions promptly.

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The joint ventures established for developing and manufacturing
technology, which imply the technology transfer from the foreign investor to the
joint venture, are those that most expose investors to the risk of being “betrayed”
by the Chinese partner.
But also in this case, foreign companies have developed excellent
operating strategies and contractual rules that effectively limit or eliminate the risk
of losing know-how and IP asset.
The most common, practical and effective strategy is that of segmenting
and distinguishing the technology and all its different components in order to not
expose the complete core technology. In fact, the biggest foreign companies
usually break up the critical core technology into different parts or materials
produced elsewhere which are sold or supplied to the joint venture by the foreign
party and sometimes just assembled by the joint venture.
It is also very important to extend some duties and obligations, such as
confidentiality and non-compete agreements, and the related contractual liabilities
in case of violations, to all the subjects involved in the tech-based joint venture,
such as employees, Chinese partners, consultants and designers, subcontractors
etc.
The joint venture should be expressly prevented from disclosing the
technology to the Chinese partner or other subjects without approval, and the
foreign party should create and monitor detailed custodial and copy-tracking
measures.
Another important action to take before to invest in a JV in China, is the
registration of patent(s) and/or trademark(s).
Most of foreign investors make the big mistake to wait that the planning and
negotiations phases are finalized to register their patents or trademarks in China.
Unfortunately, this naive oversight gives to the Chinese partner the
opportunity to register as first and as owner/original user the foreign intellectual

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properties such as company and product brand names, or simply to copy the
products to then register the same products with a different name and as original
ones.
Therefore, and because China is a strict first-to-file jurisdiction, trademarks
and patents must be registered before anyone else can do so in order to enjoy
exclusive use rights of the marks and patents.
Lastly, as a matter of contract, foreign investors should retain ownership
over improvements and the technology transfer contract should end at the same
time as the joint venture agreement.
B) Limitation of risks by limiting the Chinese management control
Statistically speaking, the success of a joint venture in China depends on
the exclusion of the Chinese partner from the management and decision power.
Foreign investors make the big mistake to implement the common Western
management and control models, thinking that in China, the 51% of ownership
grants them the full control of the joint venture.
Usually, the foreign side put all its efforts in negotiating the majority of the
ownership interest, because in this way it is entitled to elect the entire board of
directors, and through the board control the joint venture.
In order to obtain this majority, foreign investors try to balance the control
power with management structures and functions which ensure to the Chinese
partner its power over the daily operations. For example, the foreign investor
allows the Chinese partner to appoint the representative director and the general
manager and deal with the daily operations since “they are Chinese and they can
speak Chinese”.
But in a joint venture in China, the party that manages the daily operations
has de facto the control over all the joint venture, and the general manager and
legal representative become the key figures.

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Therefore, if in a joint venture in China, the traditional management and
control model based on the majority of seats in the board of directors do not
ensure the full control, the foreign partner should focus on excluding or limiting
some powers that give the real control of the joint venture.
For instance, the person who controls the registered company seal has the
power to act on the behalf of the joint venture company and to deal with the
company’s banks and other key service providers, as well as the power to
conclude binding contracts for the entire joint venture.
It is also normal that the Chinese staff transferred to the JV will follow only
the orders of the Chinese manager(s), remaining loyal to the original goals of the
Chinese company/partner.
The idyllic solution would actually be to have the majority of the board of
directors because holding the majority stake, and to have the power to appoint
and remove the JV’s legal representative and general manager.
But Chinese partners will never accept to give the full control to the foreign
partner, whilst they will aggressively try to obtain management positions.
The foreign partner may try to use the same trick of Chinese by establishing
a CJV operating as a limited liability company, where, in theory, it is possible for
a minority investor to have majority control of the board of directors, and keep the
power to appoint the legal representative and general manager, but in reality the
Chinese would hardly accept it.
If the Chinese partner insists on taking the management positions, the
foreign investor then should negotiate clear rules to control the daily business
operations and the “Chinese” manager. For example, the representative director
and the general manager, should be two different persons and, in case of
managers, recruited from the open market with unanimous board approval.
The foreign investor may also negotiate that the posts of legal
representative and manager are rotated, and add to the list of decisions that

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require unanimous board approval, certain important business decisions, giving
then the effective publicity of this list to the third parties that daily deal with
managers and legal representative such as banks, service providers etc.
For completeness of analysis, there are cases in which the Chinese partner
accepts a minority position but it can still compromise the foreign control of the
joint venture through its veto rights for all the matters that require unanimous
board approval.
This interference in the decision power may turn into serious problems
when the joint venture has to take promptly some crucial decisions due for
example to changes in market conditions, including consolidation of multiple JVs
in which a foreign investor has an equity interest in order to rationalize and achieve
economies of scale, merger, division, dissolution or simply amendment of the
constitutional documents.
One method to “try” to solve this problem is converting the JV into a wholly
owned subsidiary of an offshore vehicle with the foreign investor and minority
Chinese investor holding shares in the offshore vehicle. This conversion would
allow the foreign investor to be in full control of the offshore vehicle and
consequently of the JV.
Another option, which requires a majority of 67%, is to convert the JV into
a Foreign-Invested Company Limited by Shares (FICLS). A FICLS has a different
corporate governance structure, and with a majority of 67% shareholding, the
foreign investor can acquire effective control of the FICLS highest governing body,
the shareholder’s general meeting.
In this way, through the general meeting, the main important decisions can
be approved, although this solution is unsuitable when decisions need to be taken
promptly since the conversion process requires central MOFCOM approval and
thus it takes time to be finalized.

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PRC Joint Ventures Legal Framework
The laws and regulations related to sino-foreign joint ventures were the first
Chinese legislative measures that allowed foreign enterprises to operate in China.
Over the years, in order to create a favorable investment environment and
to encourage overseas firms to invest in China, the Chinese government has
gradually set up a relatively complete legal system, specifically to regulate the
foreign-invested enterprises (FIEs), by creating a foreign investment policy
system, which mainly includes industrial policies, regional policies, tax policies
and financial polices.
Therefore, the main laws and regulations that compose the PRC joint
ventures legal framework, include:
Law of the People’s Republic of China on Sino-foreign Equity Joint
Ventures (hereinafter referred to as EJV Law);
Regulations for the Implementation of the Law on Sino-foreign Equity Joint
Ventures (hereinafter referred to as Regulations of EJV);
Law of the People’s Republic of China on Sino-Foreign Co-operative Joint
Ventures (hereinafter referred to as CJV Law);
Detailed Rules for The Implementation of The Law on Sino-Foreign
Cooperative Joint Ventures (Detailed Rules of CJV).
The above measures, which specifically and directly regulate joint ventures
in China, are integrated by other laws and regulations, which directly apply to or
indirectly affect FIEs, such as (but not limited to):
Foreign investment industrial guidance catalogue 2015;
The Company Law of the People’s Republic of China;
The Contract Law of the People’s Republic of China;
The Insurance Law of the People’s Republic of China;
The Arbitration Law of the People’s Republic of China;
The Labor Law of the People’s Republic of China;

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The Price Law of the People’s Republic of China;
The Anti-Monopoly Law of the People’s Republic of China;
The Enterprise Income Tax Law of the People’s Republic of China;
The Individual Income Tax Law of the People’s Republic of China.
In addition, it deserves a special mention the China’s Standing Committee
of the National People’s Congress resolution (the “2016 NPC Resolution”), which
has marked another important milestone in the development of FIEs Investment
Administration in China.
Briefly, the 2016 NPC Resolution has abolished the country’s three-decade-
long approval regime for the establishment of foreign-invested enterprises and
adopted a much simplified record-filing system.
In fact, in addition to specific laws and regulations, an FIE/JV, regardless of
its investment scale, industry and term, was generally required to obtain approvals,
primarily from the MOFCOM or its local branches, for its establishment, equity
transfer, capital increase or decrease, termination and liquidation, or more general,
goes through the several administrations and departmental regulations governing
the various foreign investment related issues, such as mergers and dissolutions,
foreign exchange, and beneficial tax treatments.
The NPC Resolution and its implementing measures, are the most recent
initiatives, which are aimed at relaxing the regulatory framework for foreign
investment.
Cooperative Joint Venture (CJV):
A) Cooperative Joint Venture without Chinese legal person status
A Sino-Foreign Cooperative Joint Venture (CJV), also referred to as
Contractual Joint Venture, is a joint venture between a Chinese and a foreign
company within the territory of China, which is organized by means of a contract
rather than equity interest.

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According to Article 4 of the Detailed Rules of CJV, a cooperative joint
venture may be either a joint venture with the status of a Chinese legal person or
without the legal person status.
Thus, there are two types of CJV:
CJV formed as a Chinese limited liability company. In this case, the CJV
acquires the legal status of Chinese legal person and the new legal entity
owns all the contributed assets, and the liabilities of the investors are limited
to contributions made to the registered capital of the CJV.
CJV without legal person status where the partners operate as separated
legal entities. In such cases, the contributions remain property of the
partners, the income generated becomes the joint property of the partners,
and the partners are jointly and severally liable to the extent of their total
assets.
More specifically, the Detailed Rules of CJV set special provisions (Chapter
IX) to apply to the cooperative joint ventures without legal person status. In
this type of CVJ all partners bear joint liability for civil liabilities.
Like a CJV limited liability company, a CJV without legal person status shall
register the investment made or cooperation conditions provided by each party at
the administrative authority for industry and commerce (AIC).
Always like the CJV limited liability companies, the law grants wide freedom
of contract to partners in order to choose the nature and percentage of
contributions as well as ownership of the investment made or cooperation
conditions provided by parties. In fact, according to the law, investment or
cooperation conditions may be jointly owned by all parties, or partly owned by
each contributing party and partly owned by all parties.
Assets accumulated from operations of the cooperative joint venture shall
belong to all parties, but because in a CJV without legal person status, partners
are jointly and severally liable to the extent of their total assets for the debts and

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liabilities of the CJV, the investment made or cooperation conditions provided by
parties to the cooperative joint venture are subject to unified management and
utilization by the cooperative venture. Article 52 of the Detailed Rules of CJV
expressly states that no party can “take the liberty to take actions on such matters
without the consent from other parties.”
In fact, a cooperative joint venture without legal person status has to
establish a joint management committee, which consists of representatives of all
parties to the cooperative joint venture and it has to manage the cooperative joint
venture on behalf of all parties.
The joint management committee is the only body entitled to take decisions
on all major issues concerning the cooperative joint venture.
Lastly, and always as special rule due to the lack of separation of the liability,
a cooperative joint venture without legal person status has to establish unified
account books on the location of the joint venture, and each party to the joint
venture has to establish its own account books.
B) The Agreement and Contract of CJV
A CJV is established through a co-operative joint venture contract
(therefore it is also called contractual joint venture) and parties can enjoy great
flexibility in structuring the joint venture.
In fact, according to the CJV Law, partners are free to set the terms of
cooperation and provisions on such items as investment, distribution of earnings
or products, sharing of risks and losses, method of business management and
the ownership of property on the expiry of the contract term.
The Detailed Rules of CJV make clear the difference between agreement
and contract by specifying that the cooperative joint venture agreement refers
to a written document produced after all parties reached consensus on the
principles and significant matters in relation to the establishment of the
cooperative joint venture, whilst the cooperative joint venture contract refers

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to a written document produced after all parties reached consensus on their
respective rights and obligations in the cooperative joint venture.
Always the Detailed Rules of CJV clearly establish that in case of
“inconsistent” contents in the agreement and articles of association with the
contract of a cooperative joint venture, the contract shall prevail, and if parties
agree to sign only the articles of association and contract, the agreement may be
omitted.
According to the Article 12 of the Detailed Rules of CJV, the contract of a
cooperative joint venture shall bear the following items:
names, place of registration, domicile of all parties, and names, titles and
nationalities of their legal representatives (where the foreign party is a
natural person, his/her name, nationality and domicile);
name, address and business scope of the cooperative joint venture;
total amount of investment, registered capital, way and duration of
investment or cooperation conditions contributed by each party;
transfer of investment contribution or provision of cooperation conditions by
each party;
distribution of income or products to all parties, apportioning of risk or loss
between the parties;
composition of the board of directors or the joint management committee,
allocation of the members of the board of directors or the joint management
committee;
responsibilities of and the ways for employment and dismissal of the
president and other senior management people;
main production equipment and production technology to be employed, and
their sources;
arrangement for sales of products in and outside China;
arrangement for the income and expenditure of foreign exchanges of the
cooperative joint venture;
duration, dissolution and liquidation of the cooperative joint venture;

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other obligations of the parties and the responsibilities arising from breach
of the contract;
principles for handling finance, accounting and auditing;
settlement between and among all parties;
procedures for amending the cooperative joint venture contract.
The agreement and the contract signed by the legal representatives or
representatives authorized by them of all parties to the joint venture have to be
submitted to the examination and approval authority by the Chinese party/parties.
The law allows the foreign party to “accompany” the agreement and
contract written in Chinese by a version of a foreign language agreed upon by all
parties.
The parties are allowed to amend the cooperative contract but only after
“consultation” and if they unanimously agree on the changes. In addition, the
amendments have to be reported to the examining and approving organ for
approval, and if the amendments involve items for official industrial or commercial
registration or tax registration, the procedure of registration of the amendments
will be conducted with the administration for industry and commerce or the
taxation organ.
C) Investment, Capital Contributions and Registered Capital of CJV
In a cooperative joint venture is necessary distinguish the concept of “total
amount of investment” from that of “registered capital”.
Article 15 of the Detailed Rules of CJV defines the total amount of
investment of a cooperative joint venture as the sum of funds necessary for
reaching the production scale provided for by the cooperative joint venture
contract and the articles of association of the cooperative joint venture.
The law then defines the registered capital of a cooperative joint venture as
the total amount of capital contributed by all parties to the cooperative joint venture

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and registered with the AIC when applying for the establishment of the
cooperative joint venture.
Investment or terms for cooperation by Chinese and foreign partners may
be in the form of cash, kind, land-use rights, industrial property rights, non-
patented technology and other property rights.
There is no minimum foreign contribution required to establish a
cooperative joint venture and the registered capital can be either denominated in
Renminbi Yuan or in any other freely convertible foreign currency as agreed upon
by all parties to the cooperative joint venture.
Any decrease in the registered capital of the cooperative joint venture is not
allowed during the term of cooperation. However, any decrease necessary due to
changes in the total amount of investment and production scale, is subject to the
approval of the examination and approval authority.
For a cooperative joint venture, which has obtained the status of a Chinese
legal person, the investment made by the foreign party shall be no less than 25%
of the registered capital of the venture.
For a cooperative joint venture without the status of a legal person, the
specific requirements for the investment made and cooperation conditions
contributed by all parties to the venture are subject to the regulations stipulated
by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC).
The investment made or cooperation conditions provided has not be
property or property rights already posted as mortgage or other forms of collateral.
Where the investment or cooperation conditions provided by the Chinese party
fall into the category of State assets, the law requires an asset evaluation.
In the event of a failure to make the investment or provide the cooperative
conditions as set forth by the cooperative joint venture contract, the AIC will
specify a time limit to fulfill the obligation. If the obligations are still not performed
upon the expiration of the specified time limit, the examination and approval

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authority revokes the certificate of approval and the AIC revokes the business
license of the cooperative joint venture and makes a public announcement to that
effect.
All parties to a cooperative joint venture have to stipulate, based on the
production and operation requirements of the venture, the duration of the
investment to be made and the cooperation conditions to be contributed in the
joint venture contract.
The party failing to make investment or provide cooperation conditions as
set forth by the cooperative joint venture contract will be held liable for the breach
of contract to the other party that has performed its duties as stipulated in the
contract.
The investments made or cooperation conditions contributed by all parties
to the cooperative joint venture is subject to verification, and reports of verification
have to be submitted by accountants registered in China.
The certificate of contribution includes the following items:
name of the cooperative join venture;
date of the establishment of the cooperative joint venture;
names of all parties to the cooperative joint venture;
contents of the investments made or the cooperation conditions contributed
by all parties to the cooperative joint venture;
date of contribution of investments or provision of operation conditions by
all parties to a cooperative joint venture;
serial number and date of issuance of the certificate of contribution.
Copies of the certificate of contribution have to be submitted respectively to
the examination and approval authority and the AIC.
The rights inherent to contributions may be transferred by a party to another
party of the joint venture entirely or partially, or may be transferred by a party of a
joint venture to a third party entirely or partially, provided that there is the

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consensus expressed in written form of the subject to whom the rights are
transferred, and the transfer has been approved by the examination and approval
authority.
The examination and approval authority will decide to approve or
disapprove the assignment within 30 days of receipt of the relevant documents.
D) Purchase of Materials and Marketing of Products
A cooperative joint venture can work out production and operation plans on
its own, based on the approved business scope and scale of production and
operation.
However, a cooperative joint venture is allowed to purchase either within
the territory of China or from foreign countries machines and equipment, raw
materials, fuels, parts and components, accessories, transportation tools and
office articles, etc.
Cooperative joint ventures which intend to import and/or export products
have to apply for import or export licenses and quotas for products subject to
licensing and quota administration.
Cooperative joint ventures may directly sell their products on international
markets or entrust overseas distributors or Chinese foreign trade companies to
sell their products by proxy or on commission.
The price of products can be freely decided by the joint venture, and
products have to be sold in accordance with the sales methods and provisions
described in the approved contract of the venture.
However the law sets some limits by fixing that the export products cannot
be sold at “prices ostensibly lower than reasonable prices of products of the like
on international markets” or import materials at “prices higher than those of
products of the like on the international markets”.

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Machines and equipment, parts and components as well as other materials
imported by the foreign party as investment in kind and machines and equipment,
parts and components and other materials needed in production and operation,
which are imported by the cooperative joint venture with funds of the total
investment, are exempt from import tariffs and turnover tax in the import links.
The imported materials which are exempt from tariffs and tax and resold
within the territory of China or put into domestic commercial channel upon
approval, are subject to tariffs and tax or overdue tariffs.
E) Profits and losses of CJV. Recovery of Investment and Distribution of
Income
Profits and losses in a cooperative venture are divided according to the
terms of the cooperative venture contract rather than by investment share,
allowing a more flexible schedule for return on investment and investment risk in
cases where one investor provides cash while the other party’s investment is
primarily in kind.
In fact, the Detailed Rules of CJV expressly allow parties to distribute
income through profit-sharing or other forms as agreed upon by both parties, and
distribute income or products and bear the responsibility for risks or losses in
accordance with the provisions they have stipulated in the joint venture contract.
In addition, the Chinese and foreign partners may agree in the joint venture
contract that, on the expiry of the duration of the term of cooperation, all the fixed
assets of the joint venture will be returned gratis to the Chinese partner, and the
methods to allow the foreign partner to recover its investment within the term of
cooperation.
If parties agreed to transfer the fixed assets of the venture on the expiration
of the cooperation to the Chinese party on a gratuitous basis, the foreign party
may apply, within the term of the cooperation, for an early recovery of its
investment in the following ways:

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on the basis of distribution according to the contribution of investment or
cooperation conditions, agreement shall be reached in the contract of the
cooperative joint venture to increase the proportion of profit sharing to the
foreign party;
upon examination and approval by the finance and taxation authorities
according to State provisions on taxation, the foreign party may first recover
its investment before income tax payment is made by the cooperative joint
venture;
other means of investment recovery approved by the finance and taxation
authorities and the examination and approval authority.
For a cooperative joint venture that allows the foreign party to first recover
the investment, the Chinese and foreign parties have to share the liabilities of the
cooperative joint venture in light of relevant legal provisions and agreements in
the joint venture contract.
When the foreign party of the venture applies for an early recovery of
investment on the basis of distribution according to the contribution of investment
or cooperation conditions, or upon examination and approval before income tax
payment is made by the cooperative joint venture, the party has to specifically
explain the amount of the investment and the time and ways it would like to first
recover such investment. If there are losses, the foreign party cannot recover its
investment unless the losses of the cooperative joint venture are recovered.
Dividends, funds distributed by the joint venture at the termination, and any
other legal income, may be remitted abroad by the foreign partner provided that it
has fulfilled all obligations as prescribed in the laws and regulations and the
stipulations of the joint venture contract.
The income in form of wages or other legal earnings of employees of foreign
nationality of the joint venture may be remitted abroad after the payment of
individual income tax.

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F) Management of CJV. Board of Directors, Joint Management
Committee and General Manager
According to Detailed Rules of CJV, cooperatives joint ventures have to
establish a board of directors or a joint management committee.
The board of directors or the joint management committee is the highest
decision-making organ on the major important issues concerning the cooperative
joint venture, and in the articles of association, parties have to lay down provisions
governing the two organs such as:
composition, terms of reference and proceedings of the board of directors
or joint management committee of the cooperative joint venture;
term of office for directors of the board of directors or members of the joint
management committee;
terms of reference of chairman and vice chairmen of the board of directors
or director and deputy directors of the joint management committee;
decision making process and voting procedures of the board of directors or
the joint management committee;
other rules of the board of directors or the joint management committee
which are not stipulated in the Detailed Rules of the CJV;
establishment, terms of reference and rules for handling matters of the
operation and management body;
terms of reference, engagement and dismissal of general manager and
other senior management personnel.
In general the articles of association of a cooperative joint venture is a
written document, in which, as primary source, partners lay down the principles of
organization and method of operation and management as agreed on by all
parties in line with the cooperative joint venture contract. Where there are any
contents in the agreement and articles of association, which are inconsistent with
the contract of a cooperative joint venture, the contract shall prevail.

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However, the Detailed Rules of CJV provide some rules related to the main
functions and issues of the two corporate bodies, which are also limits to the
autonomy of the parties in the articles of association.
For a CJV operating without a separate legal person status, as already
mentioned it, the law prescribes the establishment of a joint management
committee instead of the board of directors, which is the only body entitled to take
decisions on all major issues concerning the cooperative joint venture.
The board of directors or the joint management committee has to consist of
at least three persons.
The allocation of members is, through consultations between the Chinese
party and the foreign party, decided with reference to the proportion of the
investments or cooperation conditions contributed by each party.
Directors of the board of directors or members of the joint management
committee are appointed or replaced by all parties themselves.
The selection of chairman and vice chairmen of the board of directors, or
director and deputy directors of the joint management committee, has to be
indicated in the articles of association of the cooperative joint venture.
However, where the position of chairman of the board of directors or director
of the joint management committee is assumed by a nominee of the Chinese party
or the foreign party, the position/positions of vice chairman/chairmen or deputy
director/directors are assumed by a nominee of the other party.
The tenure of directors and members on the joint management committee
is decided by articles of association of the cooperative joint venture, with each
tenure no longer than three years. Upon expiration of each tenure, directors and
members may renew their tenure if reappointed by the appointing party.
Directors of the board or members of the joint management committee have
to meet at least once a year, with the meeting convened and presided over by the
chairman of the board or director of the committee.

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Where the chairman of the board or the director of the committee is unable
to perform his/her duties out of special reasons, he/she may appoint a vice
chairman of the board, deputy director of the committee, other directors or
members to convene and preside over such meetings.
Meetings of the board or committee may be convened on proposals made
by more that one third of the total number of directors or members, and the
meetings of the board or committee can only be convened with the presence of
more than two thirds of directors or members. All directors or members shall be
notified of the board or the committee meetings 10 days prior to their convocation.
Directors or members who neither participate in the meetings nor entrust
others to participate on their behalf without any “reasonable” excuse are regarded
as having participated in the meetings of the board or the committee and
having lodged abstention votes.
Directors or members unable to participate in such meetings can entrust, in
written form, others to participate in such meetings and lodge votes on their behalf.
As general rule, the decisions taken at the board or the committee meetings,
to be legally valid and binding for the joint venture and the parties of the joint
venture, have to be adopted with the consents of more than half of the directors
or members, and the decisions may also be made by the board or the committee
through correspondence.
But the law requires the unanimous consent of all the directors or members
participating in the meetings of the board or the committee for the decisions
concerning the following items:
amendment to the articles of association of the cooperative joint venture;
increase or reduction of the registered capital of the cooperative joint
venture;
dissolution of the cooperative joint venture;
mortgage of the assets of the cooperative joint venture;

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merge and split of the cooperative joint venture and change in the form of
the organization;
other matters which may only be decided with unanimous consent at the
meetings of the board or the committee as previously agreed upon by
parties to the joint venture.
The chairman of the board or the director of the committee is the legal
representative of the cooperative joint venture. Where the chairman of the board
or the director of the committee is unable to perform his duty out of special reasons,
vice chairman of the board, deputy director of the committee, other directors or
members are authorized to represent the cooperative joint venture in its external
relations.
The board of directors or the joint management committee is in charge of
engaging and dismissing one general manager who will be responsible for the
routine and management operations of the joint venture and accountable to the
board of directors or the joint management committee.
The role of general manager and other senior managers may be assumed
by Chinese or foreign citizens, and by directors of the board or members of the
joint management committee.
The general manager or other senior managers who are incompetent or
found to have actions of malpractice or serious negligence of duty may be
dismissed as decided by the board of directors or the joint management
committee, and those who cause losses to the cooperative joint venture will be
held liable for the losses.
A cooperative joint venture, only after its establishment, is allowed to entrust
business and management operations to a third party external to the joint venture,
but only if there is the unanimous consent of the board of directors or the joint
management committee.

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In addition, in order to delegate business and management operations to a
third party, it is mandatory a contract of trusteeship in which clearly are indicated
the business and management operations that the trustee is entitled to take.
The cooperative joint venture have then to submit documents such as the
resolution of the board of directors or the joint management committee, the
contract of trusteeship that has been signed and the financial credit documents of
the trustee, to the examination and approval authority for approval. The
examination and approval authority shall decide to approve or disapprove within
30 days upon receipt of the documents.
G) Duration, Dissolution and Liquidation of CJV
The law does not set any time limit on the duration of a cooperative joint
venture, and therefore parties are free to stipulate a term which has to be indicated
in the joint venture contract.
However, if the Chinese and foreign partners agree to extend the term of
cooperation, they have to apply to the examining and approving authority 180
days before the expiry of the term of cooperation.
The examining and approving organ will decide whether or not to approve
the application within 30 days of receipt.
The application for an extension of the duration of the joint venture is a
slightly complex procedure because the parties have to submit to the examination
and approval authority, all the due explanations on the execution of the contract
establishing the cooperative joint venture, reason(s) for the extension, agreement
on rights and obligations and other matters of each party in the extended period.
Upon approval of the extension of duration, the cooperative joint venture
will go through formalities for the alteration of registration with the AIC, and the
extended duration starts from the first day after the expiration of the original term
of cooperation.

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The duration for a cooperative joint venture cannot be extended if the joint
venture contract has allowed the foreign party to early recover its investment and
such investment has been fully recovered. However, if the foreign party agrees to
increase the investment, the joint venture can apply an application for extension
of the term of cooperation.
A cooperative joint venture shall be dissolved in one of the following
situations:
termination of duration;
inability to continue operations due to “have” financial losses of the
cooperative joint venture or heavy losses caused by force majeure;
inability to continue operations due to the failure of one or several parties to
fulfill the obligations as stipulated in the contract and articles of association;
occurrence of other reasons for dissolution stipulated in the contract and
articles of association;
revocation made by authorities according to law due to violation of laws and
administrative regulations.
In the second and fourth cases, the decision to dissolve the joint venture is
competence of the board of directors or joint management committee, which, after
having verified the occurrence of the causes that make the cooperation impossible
to continue, have to submit their decision to the examination and approval
authority for approval.
In the third case, the party or parties failing to fulfill obligations as stipulated
in the contract and articles of association will be held liable to losses thus occurred
to party or parties fulfilling the stipulated obligations. The party or parties that have
fulfilled their obligations have the rights to apply to examination and approval
authority for the dissolution of the cooperative joint venture
The liquidation procedures of a cooperative joint venture shall be handled
according to relevant Chinese laws, administrative regulations and stipulations in
the joint venture contract and articles of association.

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On the expiry or premature termination of the term of the cooperative
enterprise, assets, claims and debts shall be liquidated in accordance with legal
procedures.
Chinese and foreign partners shall determine ownership of cooperative
enterprise property in accordance with the stipulations of the cooperative joint
venture contract.
On the expiry or premature termination of the term, the procedures for the
cancellation of registration of the cooperative joint venture will be carried out with
the administration for industry and commerce and the taxation organ.
Equity Joint Venture (EJV):
A) The Agreement and Contract of EJV
Like the cooperatives joint ventures, the legislator makes clear the
difference between the agreement and contract of a equity joint venture, by
defining the joint venture agreement as “a document agreed upon by the parties
to the joint venture on some main points and principles governing the
establishment of a joint venture”, and the joint venture contract as “a document
agreed upon and concluded by the parties to the joint venture on their rights and
obligations”.
Always like the CJVs, in case of conflicts between the agreement and
contract, the contract prevails, and if the parties to the joint venture agree to sign
only a contract and articles of association, the agreement may be omitted.
The joint venture contract have to include the following items:
the names, the countries of registration, the legal addresses of parties to
the joint venture, and the names, professions and nationalities of the legal
representatives;
name of the joint venture, its legal address, purpose and the scope and
scale of business;

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total amount of investment and registered capital of the joint venture,
investment contributed by the parties to the joint venture, each party’s
investment proportion, forms of investment, the time limit for contributing
investment, stipulations concerning incomplete contributions, and
assignment of investment;
the ratio of profit distribution and losses to be borne by each party;
the composition of the board of directors, the distribution of the number of
directors, and the responsibilities, powers and means of employment of the
general manager, deputy general manager and other senior management
personnel;
the main production equipment and technology to be adopted and their
source of supply;
the ways and means of purchasing raw materials and selling finished
products;
principles governing the handling of finance, accounting and auditing;
stipulations concerning labor management, wages, welfare and labor
insurance;
the duration of the joint venture, its dissolution and the procedure for
liquidation;
the liabilities for breach of contract;
ways and procedures for settling disputes between the parties to the joint
venture;
the language used for the contract and the conditions for putting the
contract into effect.
Unlike cooperative joint ventures, where parties may “accompany” the
Chinese version of the contract, articles of association and agreement, with a
version written in a foreign language agreed by all parties, but without prejudice
to the prevalence of the Chinese version on the foreign version, the Regulations
of EJV expressly recognize equal validity to the foreign versions of the mentioned

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documents which may be written simultaneously and agreed by all parties of the
joint venture.
In case of conflicting contents between the different versions of the
documents, the examination and approval authority shall demand an amendment
to it within a limited time.
Parties may add annexes or amendments to the contract of a equity joint
venture which have equal validity with the contract itself.
The agreement, contract and articles of association and their amendments
come into force after being approved by the examination and approval authority.
B) Investment, Capital Contributions and Registered Capital of EJV
Unlike the CJVs, an equity joint venture can only take the form of limited
liability company, where each party to the joint venture assumes the liability of the
joint venture, share profits and losses, within the limits of the capital subscribed
by the party.
In an EJV, the total amount of investment (including loans) refers to the
sum of capital construction funds and the circulating funds needed for the joint
venture’s production scale as stipulated in the contract and the articles of
association of the joint venture, whilst, the registered capital is the total capital
registered at the registration and administration office for the establishment of the
joint venture, which is subscribed by all parties to the joint venture.
The proportion of investment contributed by a foreign partner as its share
of the registered capital of an equity joint venture have to be in general no less
than 25 per cent.
Like the CJVs, each party to an equity joint venture may contribute cash,
capital goods, industrial property rights, technology and equipment, site-use rights
as its investment in the enterprise, provided they meet the requirements and
conditions laid down by the Regulations of EJV.

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For instance, the technology and equipment contributed as investment by
a foreign partner have to be “genuinely” an advanced technology and equipment
appropriate to China’s needs (see also let. D Introduction of Technology). If
losses occur due to deception resulting from the intentional supply of outdated
technology or equipment, the foreign party has to compensate the losses.
The machinery, equipment and other materials contributed by the foreign
party have to be those “necessary” for the production of the joint venture. The
price of the machinery, equipment and other materials cannot be higher than the
current international market price for similar equipment or materials. The
machinery, equipment or other materials, industrial property or proprietary
technologies contributed by foreign parties as investment are also subject to the
examination and approval authority for approval.
The industrial property or proprietary technologies contributed by the
foreign party as investment has to meet one of the following conditions:
to be capable of improving markedly the performance and quality of existing
products and raising productivity;
to be capable of notable savings in raw materials, fuel or power.
The investment contribution of a Chinese partner may include providing
site-use rights for an equity joint venture during its period of operations. If site-use
rights are not part of the Chinese partner’s investment contribution, the equity joint
venture shall be required to pay site-use fees to the Chinese government.
Each party to a joint venture may contribute cash or buildings, factory
premises, machinery, equipment or other materials, industrial property,
proprietary technologies, or site use rights as investment. If the investment is in
the form of buildings, factory premises, machinery, equipment or other materials,
industrial property or proprietary technologies, the value has to be assessed
through consultation by the parties to the joint venture on the basis of fairness and
reasonableness, or to be assessed by a third party agreed upon by parties to the
joint venture.

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The registered capital may be expressed in Renminbi, or in a foreign
currency agreed upon by the parties to the joint venture.
The foreign exchange contributed by the foreign party has to be converted
into Renminbi according to the standard exchange rate announced by the
People’s Bank of China on the day of its submission or be cross exchanged into
a predetermined foreign currency. Where the cash Renminbi contributed by the
Chinese party is converted into foreign currency, it has to be converted according
to the standard exchange rate announced by the People’s Bank of China on the
day of the submission of the funds.
As general rule, an equity joint venture cannot reduce its registered capital
during the term of the joint venture. Only in case of real needs due to changes in
the total amount of investment, the scale of production and operation or other
circumstances, the joint venture can apply to the examination and approval
authority in order to obtain the reduction of its registered capital.
Any increase or reduction of the registered capital of a joint venture has to
be approved by a meeting of the board of directors and submitted to the
examination and approval authority for approval.
The parties of the joint venture have to pay in full the investment subscribed
according to the time limit stipulated in the contract. Delay in payment or partial
delay in payment is subject to a payment of interest in arrears or a compensation
for the loss as defined in the contract.
After the investment is paid up by the parties to the joint venture, a Chinese
registered accountant has to verify it and provide a certificate of verification, based
on which the joint venture shall issue an investment certificate.
An investment certificate includes the following items:
name of the joint venture;
date, month and year of the establishment of the joint venture;
names of the parties and the investment contributed;

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date, month and year of the contribution of the investment;
date, month and year of issuance of the investment certificate.
Like the CJVs, the parties of an equity joint ventures can assign all or part
of their investment subscribed to a third party, provided that there is the consent
of the other parties of the joint venture, and that the party who intends transfer the
rights has given “purchase priority right” to the other parties of the joint venture,
by offering the same conditions to the other parties and the third party.
Lastly, in order to legally finalize the transfer of rights from a party of the
joint venture to a third party, the transfer has to be approved by the examination
and approval authority.
C) Board of Directors and Management Office
The highest authority of an equity joint venture is the board of directors,
which is the only organ entitled to decide all major issues concerning the joint
venture.
According to Regulations of EJV, the minimum number of members of the
board of directors is three, and the distribution of the number of directors is
ascertained through consultation by the parties to the joint venture with reference
to the proportion of investment contributed.
The term of office for the directors is four years, and it may be renewed with
the consent of the parties to the joint venture.
The board of directors shall convene at least once every year. The meeting
shall be called and presided over by the chairperson of the board. Where the
chairperson is unable to call the meeting, he/she has to authorize the vice-
chairperson or other director to call and preside over the meeting. The chairperson
may convene an interim meeting based on a proposal made by more than one-
third of the directors.
A board meeting requires a quorum of over two-thirds (2/3) of the directors.
Where the director is unable to attend, he/she has to present a proxy authorizing

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someone else to represent him/her and vote for him/her. A board meeting shall
generally be held at the location of the joint venture’s legal address.
Decisions on the following matters can be made only after being
unanimously agreed upon by the directors present at the board meeting:
amendment of the articles of association of the joint venture;
termination and dissolution of the joint venture;
increase or reduction of the registered capital of the joint venture;
merger or division of the joint venture.
Decisions on other matters may be made according to the rules of
procedure stipulated in the articles of association.
The chairperson of the board is the legal representative of the joint venture.
Where the chairperson is unable to exercise his/her responsibilities, he/she has
to authorize the vice-chairperson of the board or other director to represent the
joint venture.
The law requires the establishment of a business management office which
is responsible for daily business management.
The business management office shall have a general manager and
several deputy general managers who shall assist the general manager in his/her
work.
The general manager carries out the decisions of the board meeting,
organize and be responsible for the daily management of the joint venture. The
general manager, within his/her authority empowered by the board, represents
the joint venture externally, and has the right to appoint and dismiss his/her
subordinates, and exercise other responsibilities and power as authorized by the
board within the joint venture.
The general manager and deputy general managers have to be appointed
by the board of directors of the joint venture. These positions may be held either
by Chinese citizens or foreign citizens.

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At the invitation of the board of directors, the chairperson, vice-chairperson
or other directors of the board may concurrently be the general manager, deputy
general managers or other senior management personnel of the joint venture. In
handling major issues, the general manager has to consult with the deputy
general managers.
The general manager or deputy general managers cannot hold posts
concurrently as general manager or deputy general managers of other economic
organizations. They also cannot have any connections with other economic
organizations in commercial competition with their own joint venture.
Where the general manager, deputy general managers or other senior
management personnel practice favoritism or seriously abuse their power, the
board of directors has the power to dismiss them at any time.
Where a joint venture needs to establish branch offices (including sales
offices) outside China or in Hong Kong or Macao, it must report to the Ministry of
Foreign Trade and Economic Cooperation for approval.
D) Introduction of Technology
The Regulations of EJV define the introduction of technology as “the
necessary technology obtained by the joint venture by means of technology
transfer from a third party or parties to the joint venture”.
The technology acquired by the joint venture has to be appropriate and
advanced and enable the venture’s products to display conspicuous social and
economic results domestically or to be competitive on the international market.
The provisions of Article 42 of the Regulations of the EJV, highlight the
“ravenous” need of technology demand of the Chinese government and the task
of bringing high tech to China assigned to joint venture enterprises.
In fact, article 42, which refer to the provisions of the article 26, establishes
that “the right of the joint venture to do business independently shall be
maintained when making technology transfer agreements, and relevant

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documentation shall be provided by the technology exporting party in accordance
with the provisions of Article 26 of these Regulations”.
The technology transfer agreements signed by a joint venture have to be
submitted for approval to the examination and approval authority.
Technology transfer agreements have to comply with the following
stipulations:
the fees for use of technology have to be fair and reasonable;
unless otherwise agreed upon by both parties, the technology exporting
party cannot put any restrictions on the quantity, price or region of sale of
the products that are to be exported by the technology importing party;
the term for a technology transfer agreement is generally no longer than ten
years;
after the expiry of a technology transfer agreement, the technology
importing party shall have the right to use the technology continuously;
conditions for mutual exchange of information on the improvement of
technology by both parties of the technology transfer agreement shall be
reciprocal;
the technology importing party shall have the right to buy the equipment,
parts and raw materials needed from sources they deem suitable;
no unreasonably restrictive clauses prohibited by the Chinese law and
regulations shall be included.
E) Right to the Use of Site and Its Fee
Equity joint ventures requiring the use of a site have to file an application
with local departments of the municipal (county) government in charge of the land,
and obtain the right to use a site only after securing approval and signing a
contract.
The use of land has to be carried out according to the principle of efficiency,
and in the joint venture contract, the partners have to stipulate in explicit terms:

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the size, location, purpose and contract period and fee for the right to use
a site;
rights and obligations of the parties to a joint venture;
fines for breach of contract in case of violations of the rights and obligations
related to the use of the of site.
If the Chinese party already has the right to the use of site for the joint
venture, the Chinese party may use it as part of its investment. The monetary
equivalent of this investment should be the same as the site use fee otherwise
paid for acquiring such site.
The standard for a site use fee is decided by the government of the province,
autonomous region or centrally administered municipality where the joint venture
is located according to such factors as the purpose of use, geographic and
environmental conditions, expenses for requisition, demolishing and resettlement
and the joint venture’s requirements with regard to infrastructure, and shall be filed
by the Ministry of Foreign Trade and Economic Cooperation and the state
department responsible for land administration.
Joint ventures engaged in agriculture and animal husbandry may, with the
consent of the people’s government of the local province, autonomous region or
centrally administered municipality, pay a percentage of the joint venture’s
business income as site use fees to the local department responsible for land
administration.
Projects of a developmental nature in economically undeveloped areas may
receive special preferential treatment in respect of site use fees with the consent
of the local people's government. The rates for site use fees will not be subject to
adjustment in the first five years beginning from the day the land is used.
After that, the interval of adjustment cannot be less than three years
according to the development and changes in geographic and environmental
conditions. Site use fees as part of the investment by the Chinese party cannot
be subject to adjustment during the contract period.

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The fee for the right to the use of site obtained has to be paid annually from
the day to begin use of the land stipulated in the contract. For the first calendar
year, the venture will pay a half-year fee if it has used the land for over six months,
but if less than six months, the site use fee will be exempt.
During the contract period, if the rates of site use fees are adjusted, the joint
venture has to pay it according to the new rates from the year of adjustment.
F) Purchasing and Selling
In its purchase of required machinery, equipment, raw materials, fuel, parts,
means of transport and items for office use, etc., an equity joint venture has the
right to decide whether to buy them in China or from abroad.
The amount of materials needed for office and daily operations of the joint
venture purchased in China is not subject to restriction.
A joint venture has the right to export its products by itself or entrust sales
agencies of the foreign party or Chinese foreign trade corporations with sales on
a commission or distribution basis.
Within the scope of operations stipulated in the contract, a joint venture may
import machinery, equipment, parts, raw materials and fuel needed for its
production, provided that the joint venture makes a plan every year for items for
which import licenses are required by state regulations, and applies for them every
six months.
For machinery, equipment and other objects that a foreign party has
contributed as part of its investment, the foreign party can apply directly for import
licenses with documents approved by the examination and approval authority. For
materials to be imported exceeding the stipulated scope of the contracts, a
separate application for import licenses is required.
A joint venture has the right to export its products by itself, but for those
products for which export licenses are required by state regulations, the joint

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venture has to apply for them every six months on the basis of its annual export
plan.
With respect to prices for materials in China and fees charged for services
such as water, electricity, gas, heat, transportation of goods, labor, engineering
design, consultation, advertisements, joint ventures will be treated equally with
other domestic enterprises.
A joint venture and other Chinese economic organizations will, in their
economic exchanges, undertake economic responsibilities and settle disputes
over contracts in accordance with the relevant laws and the contract concluded
between both parties.
A joint venture has to provide statistic data and submit statistic forms in
accordance with the Law of the People’s Republic of China on Statistics and other
state provisions on the statistics collection in relation to the utilization of foreign
investment.
G) Duration, Dissolution and Liquidation of EJV
Like for CJVs, the law does not set any time limit on the duration of an equity
joint venture, and therefore parties are free to stipulate a term which has to be
indicated in the joint venture contract.
However, a joint venture may be dissolved in the following situations:
expiry of duration;
inability to continue operations due to heavy losses;
inability to continue operations due to the failure of one of the contracting
parties to fulfill the obligations prescribed by the agreement, contract or
articles of association;
inability to continue operations due to heavy losses caused by force
majeure soon as natural calamities and wars, etc.;
inability to obtain the desired objectives of the operation and at the same
time to see a future for development;

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occurrence of other reasons for dissolution prescribed by the contract and
articles of association.
In the cases number 2, 4, 5 and 6, the board of directors has to submit an
application for dissolution to the examination and approval authority for approval.
In the situation described in number 3, the party that performs the contract
is entitled to make an application and report it to the examination and approval
authority for approval.
Always in the situation described in in number 3, the party which failed to
fulfill the obligations prescribed by the agreement, contract and articles of
association will be liable for compensation for the losses thus caused.
A joint venture announcing its dissolution must undergo liquidation
procedures. The joint venture must form a liquidation committee in accordance
with the provisions of the Measures on Liquidation Procedures for Foreign
Investment Enterprises.
The liquidation committee is in charge of the liquidation affairs. Members of
a liquidation committee are usually selected from among directors of a joint
venture.
In case the directors cannot serve or are unsuitable to be members of the
liquidation committee, the joint venture may appoint accountants and lawyers
registered in China to the committee, and when the examination and approval
authority deems it necessary, it may appoint personnel to supervise the process.
The liquidation expenses and remuneration to members of the liquidation
committee have to be paid in priority from the existing assets of the joint venture.
The tasks of the liquidation committee are:
to conduct a thorough check of the property, of the joint venture concerned,
its creditors' rights and liabilities;
to work out the statement of assets and liabilities and a list of property;

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to put forward a basis on which property is to be evaluated and calculated;
to formulate a liquidation plan.
All these tasks shall be carried out upon approval of the board of directors.
During the process of liquidation, the liquidation committee represents the
joint venture concerned in litigation, and the joint venture is liable to its debts with
all of its assets.
The remaining property after the clearance of debts can be distributed
among parties to the joint venture according to the proportion of each party’s
investment unless otherwise provided by agreement, contract and articles of
association of the joint venture.
At the time when a joint venture is being dissolved, its net assets or the
residual amount of the remaining property subtracting the not distributed profits,
various funds and liquidation expenses, that exceeds the actually paid up capital
shall be regarded as income derived from liquidation, and income tax shall be
levied according to law.
On completion of the liquidation of a dissolved joint venture, the liquidation
committee has submit a liquidation report approved by the meeting of the board
of directors to the original examination and approval authority, go through
formalities for canceling its registration and hand in its business license to the
original registration authority.
After dissolution of the joint venture, its account books and documents will
be left in the care of the Chinese party.
Differences between EJV and CJV
In both investment vehicles, parties can enjoy a relatively wide contractual
autonomy by setting their own rules related to responsibilities, obligations, rights
and interests of each partner, whereas the EJV has this division in accordance
with the ratio of equity interests, in contrast with CJV where the division is up to
the partners will.

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Thus, in an EJV each party has to provide cash or permitted contributions
in proportion to its subscribed percentage of the EJV’s registered capital.
The limited liability form and the acquisition of Chinese legal person are
mandatory for an EJV, whilst a cooperative joint venture may operate without legal
person status and the partners are treated as separated legal entities.
The profits and the net assets upon dissolution of the EJV at the expiry of
the term of operation, must be distributed strictly in accordance with the parties’
respective percentage shareholding of the registered capital of the EJV.
Unlike cooperative joint ventures, where parties may “accompany” the
Chinese version of the contract, articles of association and agreement, with a
version written in a foreign language agreed by all parties, but without prejudice
to the prevalence of the Chinese version on the foreign version, the Regulations
of EJV expressly recognize equal validity to the foreign versions of the mentioned
documents which may be written simultaneously and agreed by all parties of the
joint venture.
In a CJV, a party may contribute non-cash intangibles in the form of
cooperative conditions, where the evaluation of these cooperative conditions is
subject to partners’ valuation. In exchange for such cooperative conditions, the
party is entitled to participate in the distributable earnings of the CJV.
In a CJV, the technology eventually contributed by the foreign party as its
part of investment and capital contribution is not subject to the strict requirements
such as those for the EJV.
A CJV could be allowed to negotiate levels of management and financial
control, as well as methods of recourse associated with equipment leases and
service contracts, whilst in an EJV management control is through allocation of
board seats.

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In a CJV, foreign partners can often obtain the desired level of control by
negotiating management, voting, and staffing rights into the CJV’s articles, since
control does not have to be allocated according to equity stakes as in EJVs.
In contrast to EJVs, in a CJV the profit sharing may be in accordance with
the agreement of the parties, and the net assets upon dissolution of the CJV at
the expiry of the term of operation, may be transferred to the Chinese party without
compensation so long as the foreign party has been able to recoup its capital
contribution during the term of the CJV.
Always in contrast to EJVs, foreign companies can recover and repatriate
their capital prior to the termination of a CJV, via preferential distribution of profits
or products. This is conditional upon the Chinese partner receiving all the assets
of the CJV upon its termination and, in principle, the approvals of the financial and
tax authorities are received.
Taxation of Joint Ventures:
A) Taxes
As already mentioned it, Chinese government attracted foreign investors to
invest in sino-foreign joint ventures by offering preferential treatment in the form
of tax reductions or exemptions.
The Regulations of EJV (which apply also to CJVs), distinguish imported
and exported items of a joint venture which can enjoy a friendly tax treatment.
Except for those export items restricted by the State, taxes on export
products of a joint venture may be reduced, exempted or refunded in accordance
with the relevant provisions of the Chinese tax law.
Taxes on the following import items by a joint venture may be reduced or
exempted:
machinery, equipment, parts and other materials (“other materials” mean
required materials for the joint venture’s construction on the factory site and

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for the installation and reinforcement of machines,) which are part of the
foreign party’s share of investment according to the provisions of contract;
machinery, equipment, parts and other materials imported with funds which
are part of the joint venture’s total investment;
machinery, equipment, parts and other materials imported by the joint
venture with additional capital under the approval of the examination and
approval authority, and for which China cannot guarantee production and
supply;
raw materials, auxiliary materials, components, parts and packaging
materials imported by the joint venture for production of export goods.
However, the taxation for foreign-invested enterprises in China has
considerably changed in the last decades, and joint ventures are subject to the
great variety of different Chinese taxes.
As general rule, since the new 2008 Enterprise Income Tax Law, foreign
enterprises, and therefore joint ventures, are treated as the same as domestic
enterprises, with a general headline rate of taxation on its profits of 25%.
A JV can still get a taxation rate of 15% if there are regional and national
incentive schemes in particular sectors of industry.
A JV may also have to file various different types of tax return, monthly,
quarterly or annually, covering Enterprise Income Tax, Value Added Tax,
Consumption Tax, Stamp Duty, Land Appreciation Tax, Withholding Tax (on
foreign remittances), and, if there are employees, Individual Income Tax and
Social Security contributions, which are withheld from pay on a “pay as you earn”
(PAYE) basis.
B) Financial Affairs and Accounting
The procedures for handling financial affairs and accounting of a joint
venture are formulated in accordance with China’s relevant laws and procedures
on financial affairs and accounting, and in consideration of the conditions of the

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joint venture. The fiscal year of a joint venture coincides with the calendar year of
the Gregorian calendar (from 1 January to 31 of December).
A joint venture has to employ a chief accountant, and if necessary, also a
deputy chief accountant, to assist the general manager in handling the financial
affairs of the enterprise.
Except the small joint ventures, it is mandatory to appoint an auditor
responsible for checking financial receipts, payments and accounts, and to submit
reports to the board of directors and the general manager.
The accounting of a joint venture has to adopt the internationally accepted
accrual basis and debit and credit accounting system in their work. All vouchers
account books, statistical statements and reports prepared by the enterprise has
to be written in Chinese. A foreign language may also be used concurrently with
mutual consent.
In principal, a joint venture will adopt Renminbi as the standard currency. In
keeping accounts, however, another currency may also be used through
consultation by the parties concerned.
In addition to the use of standard currency to record accounts, joint ventures
have to record accounts in currencies actually used in payments and receipts, if
such currencies in cash, bank deposits, funds of other currencies, creditor’s rights,
debts, gains, expenses, etc., are inconsistent with the standard currency in
recording accounts.
Where foreign currency is used as the standard currency in accounting, the
joint venture has to convert the foreign currency into Renminbi in its financial
accounting reports.
Where funds are converted to the currency of a particular account, the
difference caused by differing exchange rates has to be recorded as profit or loss
on exchange.

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Recorded fluctuations in exchange rates and the book amounts of the
various related foreign currency accounts will undergo accounting treatment
during the year-end closure of accounts in accordance with China’s relevant laws
and its financial accounting system.
The principles of profit distribution after payment of taxes in accordance
with the Income Tax Law of the People’s Republic of China for Enterprises with
Foreign Investment and Foreign Enterprises are as follows:
allocations for reserve funds, bonuses and welfare funds for staff and
workers and development funds of the joint venture and the proportion of
allocations are decided by the board of directors;
reserve funds can be used to make up the losses of the joint venture, and
with the consent of the examination and approval authority, can also be
used to increase the joint venture's capital for production expansion;
after the reserve funds, bonuses and welfare funds for staff and workers
and development funds have been deducted, if the board of directors
decides to distribute the remaining profit, it should be distributed according
to the proportion of each party's investment.
Profits cannot be distributed unless the losses of previous years have been
made up. Remaining profits from the previous year (or years) can be distributed
together with the profit of the current year.
Only after being examined and certified by an accountant registered in
China can the following documents, certificates and reports be considered valid:
certificates of investment from all parties to a joint venture (lists of assessed
value and agreements signed by parties to the joint venture shall be
attached, where involving the use of materials, site use rights, industrial
property and proprietary technologies as contributions);
annual financial reports of the joint venture;
financial reports on liquidation of the joint venture.

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A joint venture will submit quarterly and annual financial reports to the
parties to the joint venture, the local tax authority and the financial department.
C) Foreign Exchange Control
All matters concerning foreign exchange for joint ventures are regulated by
the Rules of the People’s Republic of China on Foreign Exchange Control and
relevant provisions of administrative measures.
With a business license, a joint venture may open foreign exchange
accounts and Renminbi accounts with banks within the territory of China. The
bank handling the accounts of the joint venture is in charge has to exercise
supervision of receipts and expenditures.
A joint venture is required to obtain a permission from the State
Administration of Foreign Exchange or one of its local branches to open a foreign
exchange deposit account with an overseas bank or one in Hong Kong or Macao,
and report to the State Administration of Foreign Exchange or one of its local
branches its foreign exchange receipts and expenditures, and provide account
balance sheets.
Branches and divisions set up by a joint venture in foreign countries or in
Hong Kong or Macao have to submit its annual statement of assets and liabilities
and annual profit report to the State Administration of Foreign Exchange or one
of its local branches through the joint venture.
A joint venture may, in accordance with its operation needs, apply to a
financial institution inside China for foreign exchange loans and Renminbi loans.
It may also borrow foreign exchange from banks abroad or in Hong Kong or
Macao, and carry out procedures for registration or filing for record with the State
Administration of Foreign Exchange or one of its local branches.
After foreign staff and workers and staff and workers from Hong Kong and
Macao have paid income tax on their salaries and other legitimate incomes in

Joint ventures Guide in China

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