Joint Venture (JV)

Introduction of Joint Venture ("JV")

A Joint Venture is a business arrangement in which the participants create a new business entity or

official contractual relationship and share investment and operation expenses, management

responsibilities, and profits and losses.

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

labour costs, low production costs and a potentially large Chinese market share. Joint Ventures are

sometimes the only way to register in China if a certain business activity is still controlled by the

government. e.g. Restaurants, Bars, Building and Construction, Car Production, Cosmetics etc. There

are 2 types of Joint Venture:

1- EJV (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. Joint ventures are usually established to exploit the market knowledge,

preferential market treatment, and manufacturing capability of the Chinese side along with the technology,

manufacturing know-how, and marketing experience of the foreign partner.

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 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.

2- CJV (Cooperative Joint Venture)

In a Sino-Foreign Cooperative Venture (also known as Contractual Joint Venture), the parties 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.

KEY ISSUES REGARDING A JOINT VENTURE

Nature of JV Project