China Joint Ventures: Joint ventures (JV) are allowed to carry out manufacturing and sales operations in China. A JV is also permitted to sell products through its own sales network.
- Equity Joint Venture: A Company, with limited liability, set up by a Chinese company and a foreign investor, is an Equity Joint Venture. The parties share profits and losses in proportion to their respective contributions to Joint Venture's registered capital. Starting from 2001, Equity Joint Ventures are governed by the Law of the PRC on Joint Ventures using Chinese and Foreign Investment.
- Co-operative Joint Venture: The Law of the PRC on Chinese-Foreign Contractual Co-operative Enterprises governs Co-operative Joint Ventures. A Co-operative Joint Venture is similar to an Equity Joint Venture in many respects, and many of the same regulations apply. However, principal features that distinguish a Co-operative Joint Venture from an Equity Joint Venture include the following: Co-operative Joint Venture does not have to be a legal entity. The concept of registered capital is less clear than that in the case of an Equity Joint Venture. Participants in a Co-operative Joint Venture are allowed to share profit on agreed basis, not necessarily in proportion to capital contribution. During the term of the venture, the foreign participant in a Co-operative Joint Venture may recover its investment, provided that the JV contract specifies that all fixed assets will become the property of the Chinese participant at the end of the joint venture.
- Joint Venture - Registration: The foreign investor and its Chinese partner must apply to MOFTEC, or one of its local branches (the "approval authorities"), for approval to set up a JV. The law requires MOFTEC to decide within three months whether to grant approval. If the JV is approved, it must be registered within one month with the State Administration for Industry and Commerce (SAIC) to obtain a license to start business. An Equity Joint Venture is regarded as having been officially established after this license is issued.
Wholly Foreign-owned Enterprise: Under the 1986 Chinese Law of the PRC on Enterprises Operated Exclusively with Foreign Capital, foreign companies are allowed to establish Wholly Foreign-Owned Enterprises (WFOEs).
WFOE is treated as Chinese limited liability entity wholly owned by a foreign investor and is not a branch of a foreign company. However, in accordance with state policies and the Foreign Investment Catalogue, WFOEs are excluded in certain industries.
The approval and registration requirements to establish a WFOE are similar as those for JV's, except that there is no JV contract.
Representative Offices: Representative offices are normally set up to carry out liaison work of its parent office overseas. They are limited by regulations in establishing manufacturing operations or a sales network in China. Special tax rules are applied to representative offices.
Foreign investors in China must obtain various government approvals to undertake investment projects in China. These include the approval of Ministry of Foreign Trade and Economic Cooperation (MOFTEC), and that of the ministry responsible for supervising the industry to which the project belongs.
Representative offices are normally set up to carry out liaison work for the parent office overseas. The decision by MOFTEC should be issued within 30 days from the submission of the required documents. If the application is approved, the foreign company will obtain an approval certificate from MOFTEC.
Required Chinese National Participation: When China launched its economic reform programs in 1978, foreign investors were required to form joint ventures with local Chinese enterprises. This requirement has been relaxed over the years; today, foreign companies are permitted to have a majority interest in joint ventures or to establish WFOEs in certain sectors.
Generally, no specific percentage of local participation in Sino-foreign joint ventures is required. Exceptions exist for certain industries in accordance with specific government policies.
Foreign Exchange Control: The Chinese Renminbi currency is supervised by the People's Bank of China (PBOC). The exchange rate is based on the market demand and supply through the inter-bank foreign exchange market. The PBOC announces the exchange rate each day and may intervene in the market in order to stabilize the rate. The US dollar/reminbi exchange rate for the period 1994 to 2002 has been approximately 1:8.3.
At present, the Renminbi is still not a freely convertible currency. However, China has made a significant move toward free convertibility by lifting controls over current account items. In December 2001, it committed not to place any restrictions on current account items unless the International Monetary Fund (IMF) is in agreement. China is the first country to include IMF regulations into the WTO Protocols.
Chinese Taxation: Tax treatment that applied to foreign enterprises is different from those to domestic enterprises. They are governed under the Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises.
Taxable income is computed at a gross income less total costs including expenses and losses. Such a calculation is consistent with international tax practices. The standard national income tax rate for a foreign enterprise, which is engaged in business operations or production activities, is 30%. These enterprises also pay local income tax at 3%.
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