- Since it is a limited liability company, its liabilities are limited to its total assets. The liabilities of each joint venturer are limited to its share of registered capital, and nobody is accountable for the indebtedness of anybody else.
- It must be located within Chinese territory, approved by the Chinese Government, and registered with the department in charge of industry and commerce before it acquires the status of a legal person, and must pay taxes according to Chinese tax laws.
- It has full right to independent operation and the right to handle directly its imports and exports.
Is there any limit to foreign investment in a Chinese-foreign joint venture?
The law on Chinese-Foreign Joint Ventures sets a minimum of 25 percent for investment by the foreign party or parties, but no maximum. In other words, Chinese law permits a larger contribution from foreigners than from the Chinese. In this sense, China’s investment law is more liberal than those of many other countries. Chinese law does not require control over the joint venture by the Chinese participants. Among the existing joint ventures, there are cases where the Chinese hold a majority share. One example is the China Schindler Elevator Co., a joint venture of the China National Construction Machinery Co. and the Schindler Elevator Co. of Switzerland, in which the Chinese have a 75 percent share. There are also cases where the two sides invest on a 50-50 basis, such as the Shenyang Gillete Commodity Co., a joint venture with Americans. Majority foreign shares are found in the China Nantong-Rikio Co. for which the Japanese have provided 60 percent of the investment, and also in the Jianghui Shipbuilding Engineering Co., in which British investment comes to 89.5 percent.
The proportions of shares are worked out through negotiations and defined in the joint venture contract. The Chinese government encourages a majority foreign share in cases of a large investment, new technologies are brought in by the foreign participants, and the likelihood of increasing exports.
What is the nature of the capital structure of a Chinese foreign joint venture?
A joint venture if constituted as a limited liability company. Its assets consist of the shares contributed by the shareholders. Each investor is accountable for the liabilities of the venture only to the extent of his capital subscription. The liabilities of the company are limited to its total assets, and the parties to the venture are not inter-related in their responsibility for the indebtedness of the company. (See Article 4 of the Law on Chinese-foreign Joint Ventures.)
What are the differences between a Chinese-foreign joint venture and a Chinese-foreign cooperative business operation?
In China, the former is called an equity joint venture and the latter, a contractual joint venture. They are similar in two respects:
Both are legally based on the Law on Chinese-Foreign Joint Ventures and are constituted on its principles. Cooperative business operation is a flexible application of the joint venture law, and follows that law substantially until a special law is issued for such operation.
A limited liability system is followed where a cooperative entity has been established, either as an equity joint venture or as a contractual joint venture. In a case like this the parties make joint investments, whatever may be the forms, and the shares are distributed in proportion to their respective investments. The liability of each joint venturer capital contributions. However, the venture becomes one of unlimited liabilities if the participate in the contract as independent legal persons without establishing a cooperative entity.
An equity joint venture and a contractual joint venture are different in three respects:
For an equity joint venture, whatever the forms of investment, the equity ratio must be expressed in terms of money and the risks and profits are shared according to the ratio. For a contractual joint venture, the forms of investment and the method of profit-sharing are stipulated in the contract in such a way as may be agreed upon between the parties, and the shares need not be expressed in terms of money.
For an equity joint ventrue, a managerial entity has to be established with a sound organization along the lines of the articles of association, and strict rules and regulations are worked out for joint operation. For a contractual joint venture, such a managerial entity may or may not be established. The parties can cooperate as separate legal entities and carry out their respective contract obligations to achieve the purposes set forth in the contract.
As taxpayers, an equity joint venture pays according to the Income Tax Law Concerning Chinese-Foreign Joint Ventures, while foreign investors in a contractual joint venture pays according to the Income Tax Law Concerning Foreign Enterprises.
S.K.H. CHAN YOUNG SECONDARY SCHOOL PATRICK S. W. KWAN