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How to Set up a Joint Venture in China

How to Set up a Joint Venture in China

A commercial arrangement known as a joint venture involves at least two parties pooling their resources to work toward a common goal. The consistency and coordination of the various parties involved is essential to the success of such a collaboration. A foreign business may join forces with a Chinese organization to form an equity joint venture.

A joint venture company in China, also known as a Sino-foreign joint venture, is a limited liability company which is established between a foreign investor and Chinese individual or company. It differs from a Wholly Foreign-owned Entity (WFOE) in that a local partner is required.

JVs may be structured as joint stock companies or limited liability companies in accordance with the Company Law. JVs must convert to a 3-tier organizational structure in order to comply with the Company Law.

For businesses with little foreign expertise, managing a structure of this kind is more difficult because China’s business environment presents a variety of unique difficulties unmatched anywhere else in the world.

Companies that enter the country must deal with a distinct culture as well as potential managerial difficulties because they aren’t always able to exert control over the actions of the Chinese subsidiary.

Key Conserations When Setting up a China Joint Venture

Shareholder agreement

During the establishment phase, it is crucial for foreign investors to precisely outline the rights and obligations of the owners. especially given the possibility of multiple stockholders with conflicting interests.
The fundamental agreements between the shareholders, such as equity investment, ratios, etc., are described in the shareholder agreement. Prior to submitting an application for a joint venture business license, this agreement must be prepared and drafted in line with Chinese law.

Articles of association

The Articles of Association serve as the joint venture’s “constitution,” outlining its guidelines for operation. It contains crucial details about the company’s business operations, investor rights and obligations, the registered capital’s size, and the regulations governing the board of directors, legal representatives, and supervisors of the business.

Companies must keep good records of any modifications or additions to the articles of association. Any carelessness on the part of the business could have unfavorable effects.

Business scope

A business scope must be specified in the articles of association when establishing a joint venture. The joint venture’s business scope, which outlines the assortment of commercial operations it is permitted to engage in, must have administrative government offices as well as state and local tax bureaus’ approval. Only those businesses that fall under the approved business scope are allowed to operate. The business scope should be described in specific, rather than general, words. Otherwise, the tax authorities might not accept it.

Given the tax ramifications of various company scopes, it could seem alluring for some investors to declare a business scope that isn’t quite correct but is nonetheless similar to the primary business operations. However, this cannot be advised and is not advisable. Government officials are likely to learn the facts sooner or later.

Registered capital and investment

The total equity or capital contributions that must be fully paid by the JV’s shareholders are referred to as the registered capital of a company. In general, this is a tax-free donation that can be made in cash or by giving technology, equipment, or other assets. Our professionals advise that the donation be made in cash.

Within 30 years of their creation, companies must contribute the entire amount of registered capital. As a result, the capital contribution payments may be made throughout time.

The Process of Setting up a China Joint Venture

  1. Pre-approval and Registration of the Name – the company must file an online pre-approval for structural decisions and company name registration. At this stage, the company must upload digital scans of the identification documents of the relevant personnel, as well as a copy of the lease agreement.
  2. Application with the Administration for Market Regulation – after receiving the signed application documents and legalized documents from the investors the official application with the AMR can be made. If the AMR approves the business license will be issued and at that moment the Chinese subsidiary will come into existence, however, it will not be operational yet.
  3. Company Chops – once the business license has been issued the company can proceed with applying for the company chops. These chops serve as signatures on behalf of the company and make documents legally binding. The following chops need to be obtained: Company chop, Legal representative chop, Finance chop, Fapiao chop.
  4. Opening of Bank account – for a JV to be fully operational it will need to open a RMB basic account as well as a foreign capital account. Before the Chinese subsidiary can use capital funds in China, it must be converted from the foreign capital account into RMB, on the RMB basic account.
  5. Articles of Association – finalization of the JV contract and Articles of Association. This must include all info about the organization, the principles, the method of operation, management styles, and rules to be adopted.
  6. Tax Registration – any foreign invested company in China must meet tax filing compliance requirements and are required to commence with basic tax registrations within 30 days of the entity legally existing. In order to meet the requirements a company must follow the must apply for the following tax registrations:
    1. Basic registration with the National and Local Tax authority.
    2. Registration for General VAT Taxpayer status.
    3. VAT invoice fapiao registration.
    4. Company registration at the Social Security and Housing Fund.
  7. Other licenses (if applicable) – several additional licenses may be necessary such as an import/export license or a license dependent on the industry e.g., food and beverage, specific professional services, alcohol distribution etc.

China Payroll can help your company with all the steps above. Also, our one-stop-concept ensures all-around support in legal, fiscal, managerial and administrative issues.

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