China

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Country starter pack
Getting started in China
Equity joint venture (EJV)
An equity joint venture (EJV) is the second most
common structure used by foreign companies to enter
China and the vehicle most preferred by the Chinese
Government and Chinese businesses. EJVs are usually
established to exploit the market knowledge, preferential
market treatment and manufacturing capability of the
Chinese side, and the technology, manufacturing knowhow
and marketing experience of the foreign partner.
They have a duration limit that can range between 30 and
50 years.
The key attributes of an EJV are:
• Profits and losses are distributed between parties in
proportion to their respective equity
• Limited liability as a Chinese legal person
• The foreign partner must hold at least 25 per cent of
the equity interest in the registered capital.
Cooperative or contractual joint venture (CJV)
In a cooperative joint venture, also known as contractual
joint venture (CJV), there is no minimum foreign
contribution required to initiate the venture, allowing
a foreign company to take part in an enterprise where
they prefer to remain a minor shareholder. Investors’
contributions are not required to be monetary, and can
be ‘in kind’ support such as labour, resources and services.
Profit and returns are therefore not based on investment
share. Rather, they are divided according to the specific
provisions of the joint venture contract. A CJV also allows
greater flexibility in the structure of the organisation,
management and assets. There is a duration limit for
CJVs, although contracts may be renewed subject to the
consent of the parties involved and approval from the
examination and approval authorities. The foreign investor
is also permitted to withdraw all or a portion of their
registered capital from the CJV during the duration of
the CJV contract.
Foreign-invested partnerships (FIPs)
There are two other foreign investment options that
you may consider for setting up a business in China.
Foreign-invested joint stock companies (otherwise
known as foreign-invested companies limited by shares)
are not very common in China and tend to be for larger
organisations. The other is the recently introduced
foreign-invested partnership (otherwise referred to as
a general partnership or limited partnership). FIPs have
different benefits not offered by WFOE, including a
set-up process without registered capital verification, tax
savings, the options of domestic and foreign ownership
(both corporate and individual) and hiring of foreigners.
The challenge with FIPs is the unlimited liability of the
general partner.
Establishing holding companies in Hong Kong or Singapore
Another option for setting up in China, preferred by some
Australian businesses, is to establish holding companies
for their Chinese entities in the jurisdictions of Hong
Kong or Singapore. This permits Australian businesses
to partially avoid China’s regulatory environment, which
is tougher and has more extensive procedures. Holding
companies also allow for a layer of protection between
the parent company and Chinese subsidiary from
potential risks and liabilities. Benefits include:
• Tax advantages such as limited tax exposure on
capital gains and reduced withholding tax rates on
repatriation of profits
• Relatively stable and sophisticated banking and legal
systems in both Hong Kong and Singapore that can
also be used to hold offshore profits earned in China
• The ability, if needed, to easily reinvest profits (if held
in Hong Kong or Singapore) into China or expand
into the Asian region
• Easier procedures to sell the Chinese business or
introduce a third-party partner or shareholder.
So how does China rank relative to other countries for
ease of establishing a business? The World Bank and
International Finance Corporation in their Doing Business
Report 2015, have compared 189 nations on nine specific
measures related to establishing a business.
China was ranked 128th out of 189 economies for ease of
doing business, an improvement on last year’s ranking of
151. It takes 11 procedures to establish a corporate entity
in China (compared with the OECD average of five) and
an average of 30 days to complete. Further categories
are discussed on the next page.