REGISTRATION OF SINO-FOREIGN EQUITY JOINT VENTURES

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1 When the value of goods purchased is large enough, setting up a dedicated factory in China may be a consideration. It is the preferred option when issues of quality, design security and brand control are paramount. However, the effort required to build and manage a factory from the ground up can be intimidating, especially for those businesses which are new to China. For companies that want greater control over the production process, but prefer to avoid the headaches associated with going it alone in China, PassageMaker offers two forms of cooperation: Virtual Joint Venture in China: Existing PassageMaker floor space, staff and equipment are dedicated solely to the production of the client s given product. In this fashion, the client can leverage the existing PassageMaker business umbrella (space, staff, management, logistics, accounting). Compensation to PassageMaker depends on the scope of the factory formation project, but can take the form of a fixed monthly retainer and/or percentage of production value. Joint Venture in China: In cases where the production space and staffing requirements are substantial, the client and PassageMaker may form a Joint Venture at a new facility. In simple terms, under a pre-agreed compensation structure. REGISTRATION OF SINO-FOREIGN EQUITY JOINT VENTURES Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned. The Chinese authorities encourage foreign investors to use this form of company in order to obtain exposure to advanced technology and new management skills. In return, foreign investors can enjoy low labor costs, low production costs and a potentially large Chinese market share. Normally operation of a joint venture is limited to a fixed period of time from thirty to fifty years. In some cases an unlimited period of operation can be approved, especially when the transfer of advanced technology is involved. Profit and risk sharing in a joint venture are proportionate to the equity of each partner in the joint venture, except in cases of a breach of the joint venture contract. Share holdings in a joint venture are usually non-negotiable and cannot be transferred without approval from the Chinese government. Investors are restricted from withdrawing registered capital during the live of the joint venture contract. Regulations surrounding the transfer of shares with only the approval of the board of directors and without approval from government authorities will probably evolve over time as the size and number of international joint ventures 1 / 5

2 grow. There are specific requirements for the management structure of a joint venture but either party can hold the position as chairman of the board of directors. A minimum of 25% of the capital must be contributed by the foreign partner(s). There is no minimum investment for the Chinese partner(s). It is preferable that foreign exchange accounts are balanced in order to remit profits abroad so that the repatriated foreign exchange is offset by exports from the joint venture. With the elimination of foreign exchange certificates and the further opening of the China market, this requirement is becoming more and more relaxed. The permissible debt to equity ratio of a joint venture is regulated depending on the size of the joint venture. In situations where the sum of debt and equity is less than US$ 3 million, equity must constitute 70% of the total investment. In joint ventures where the sum of the debt and equity is more than US$ 3 million but less than US$ 10 million, equity must constitute at least half of the total investment. In cases where the sum of the debt and equity is more than US$ 10 million but less than US$ 30 million, 40% of the total investment must be in the form of equity. When the total investment exceeds US$ 30 million, at least a third of the sum of the debt and equity must be equity. Equity can include cash, buildings, equipment, materials, intellectual property rights, and land-use rights but cannot include labor. The value of any equipment, materials, intellectual property rights, or land-use rights must be approved by government authorities before the joint venture can be approved. After a joint venture is registered, the entity is considered a Chinese legal entity and must abide by all Chinese laws. As a Chinese legal entity, a joint venture is free to hire Chinese nationals without the interference from government employment industries as long as they abide by Chinese labor law. Joint ventures are also able to purchase land and build their own buildings, privileges prevented to representative offices. REGISTRATION OF COOPERATIVE JOINT VENTURES In a Sino-Foreign Cooperative Venture (also known as Contractual Joint Venture), the parties 2 / 5

3 involved may operate as separate legal entities and bear liabilities independently rather than as a single entity. A cooperative venture may also be registered as a limited liability entity resembling an equity joint venture in operation, structure, and status as a Chinese legal entity. There is no minimum foreign contribution required to initiate a cooperative venture, allowing a foreign company to take part in an enterprise where they preferred to remain a minor shareholder. The contributions made by the investors are not required to be expressed in a monetary value and can include excluded in the equity joint venture process can be contributed such as labor, resources, and services. Profits 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 in cases where one investor provides cash while the other party's investment is primarily in kind. Greater flexibility in the structuring of a cooperative venture is also permissible including the structure of the organization, management, and assets. There is no term for unlimited terms in cooperative ventures, but also no provisions for the term of the duration. The term of the cooperative venture contract may be renewed subject to the consent of the parties involved and approval from the examination and approval authorities. The foreign investor is permitted to withdraw their registered capital or a portion thereof from the cooperative venture during the duration of the cooperative venture contract. Because of the unique privileges and added features offered to the foreign party in a cooperative venture, trade unions must be allowed to represent the employees in employment matters to protect the interests of the employees. Joint ventures with Chinese companies offer one of the most effective ways for western companies to tap the massive China market. In a sino-foreign joint venture, the Chinese company usually brings the labour, land use rights and factory buildings, while the foreign company delivers the necessary technology and key equipment, as well as the capital. If the joint venture is based on a cooperative contract in which issues like the terms of cooperation, the allocation of earnings, the ownership of property upon the termination of the contract, the sharing of risks and losses, etc are laid down, it is called a cooperative joint venture (CJV). Whereas a sino-foreign Equity Joint Venture (EJV) is a limited liability company, the share holdings in which are usually non-negotiable and cannot be transferred without approval from the Chinese government. Investors are restricted from withdrawing registered capital during the life of the equity joint venture contract. 3 / 5

4 JOINT VENTURE PRACTICE IN SHENZHEN As the investment regulation and business environment changes in China, less and less foreign investor use joint venture as the investment vehicle. RO and WFOE are now most commonly used.jv is fading out because of the practical difficulties in : - picking the proper China partner - management - technology transfer - profit sharing, etc. Shenzhen is one of the best choices for doing business in China. Situated in the Pearl River Delta, Shenzhen is the first Special Economic Zone since China carried out reform and open-door policy 30 years ago. Shenzhen has an area of 1953 square km s and a population of more than 10 million. Shenzhen is the best city both for living and working in China, as well as the fastest growing city in the world. In Shenzhen you can enjoy the sound infrastructure and the intensive industrial chain for trading, manufacturing and value investment. Since Shenzhen is bordering Hong Kong, you can also take great advantage and opportunity from the one country, two systems policy. There are three primary differences between an EJV and a CJV: While an EJV is always a legal person, and thus a limited liability company, a CJV can be a legal as well as a non-legal person. The latter option means the partners of the joint venture would be personally liable for any losses the company might make in the future. In an EJV the division of profits has to take place equivalent to the ratio of the capital contributions made by the parties, while the profit division in a CJV can take place according to the parties' wishes. A CJV is thus a lot more flexible than an EJV. In a CJV a party may, besides contributing registered capital, provide for so-called cooperative conditions, e.g. market access rights.before applying for the establishment of a joint venture, the following documents have to be at hand: 4 / 5

5 The necessary work and resident permits for the legal representatives: The approval and corresponding certificate from various relevant authorities like the Planning Bureau, the Public Security Department, the Foreign Economic and Trade Bureau, etc.the approval from the Industrial and Commercial Registration Office to use a certain company name.a report of corporate capital verification issued by a Chinese public accountant.after all the above documents are obtained, you shall go through the following procedure: Firstly, the proposal for the establishment of an EJV has to be submitted to the relevant examination and ratification authorities. Once the proposal has been approved work can start on researching the project feasibility.as soon as the research on the project feasibility has been completed, the reports thereon have to be submitted. Once they are approved, the parties involved can start negotiations on the signing of the legal documents, such as the contract or the articles of corporation of the company. As soon as the negotiations are completed successfully, the contract and the articles of corporation of the company to be finished have to be submitted to the relevant departments of the Ministry of Foreign Trade and Economic Cooperation. Once they have approved the documents, they will issue the Approval Certificate for Enterprises with Foreign Investment.With the issued Approval Certificate, the investors will have to go to the State Administration of Industry and Commerce to complete the registration procedure for the company. To simplify the establishment of a business in China for foreign companies, municipalities and provinces have established so-called foreign investment service centers, which offer foreign investors a complete service from the first consultation on how to open a company in China to the obtainment of the approval from the government. 5 / 5