Corporate Structures for Foreign Investors
Generally, there are four types of corporate structures available to foreign investors in China: a representative office; a wholly foreign owned entity (WFOE); an equity joint venture (EJV); and a contractual joint venture (CJV).Representative Office
Establishing a representative office in China is a common entry strategy. Although representative offices are not limited to particular industries, they are restricted to how the office is allowed to conduct business. In short, a representative office is prohibited from engaging in direct business activities and should mainly conduct market research, liaison activities, and preliminary market investigations for the parent company.
Whether a representative office is taxable in China depends on the nature and level of its activities. If a representative office merely provides a point of contact, then it should not be subject to income tax in China. However, if its level of activities includes the provision of purchasing or quality control services to the parent company, the representative office might be subject to tax on a 'deemed income' basis.
Wholly Foreign Owned Entity
A wholly foreign owned entity (WFOE) is an autonomous legal entity whereby the ownership resides solely with the foreign investors. It registers in China as a Chinese legal entity and independently performs its business activities subject to the business scope approved on its business licence. WFOEs are becoming an increasingly popular investment vehicle.
The principle characteristics of a WFOE are as follows:
* registered legal person
* employ Chinese labour in accordance with local and central government laws
* sign separate contracts with government authorities and or Chinese business entities for land use rights, buildings, and utilities
* trade unions are encouraged, but not required
* exclusive management control
* autonomy in operations and management
The duration of a WFOE is fairly open and amenable to revision. The WFOE law stipulates that the term of operation of such an entity must be stated in the written application, but it is easily extended or easily dissolved if required.
Equity Joint Venture
An equity joint venture (EJV) is a corporate structure that allows for foreign investment in Chinese enterprises. It takes the form of a limited liability company in which each party is liable for the capital subscribed to it.
The principle characteristics are as follows:
* 50-year term, which may be extended
* profit and risk sharing proportionate to capital share
* nonnegotiable share holdings
* regulated debt-equity ratios
* specific requirements for management structure with either party being chairman of the board of directors
* minimum 25 percent foreign capital contribution
* investors restricted from withdrawing registered capital during the life of the contract
* remittance of profits abroad
* may only be terminated upon the agreement of the investors and approval by the original approval authorities
Compared with other forms of investment, an EJV offers the advantage of a fairly well developed regulatory environment.
In short, while the EJV is the most highly regulated of the investment vehicles offered, this regulation provides for greater stability and security for the foreign investor.
Contractual Joint Venture
A contractual joint venture (CJV) closely approximates a typical partnership and is sometimes referred to as a cooperative joint venture. A CJV registered as a legal entity is a limited liability company that assumes liability for debt within all its properties.
The principle characteristics are as follows:
* there are no limits on duration of the JV
* no minimum foreign contribution is required
* contribution is not necessarily expressed in monetary value
* contribution resembles that allowed for EJVs and may include labour, resources, and services
* profits are divided according to the contract terms rather than investment share
* foreign investor may withdraw registered capital during the duration of the contract
* trade unions are required
Appeal in a CJV is the flexibility it offers in terms of the size, duration and initial investment in the project.
Profit sharing of a CJV is determined under discussions occurring on a yearly basis between partners, rather than the exact distribution of profits according to invested capital associated with that of an EJV. The intent of this structure is to make the project more appealing to the foreign investor. Often in the initial stage of cooperation, the foreign partner will receive a higher profit distribution in order to repay loans. Later on, the Chinese partner would receive a greater proportion of the profits. This flexible profit sharing allows for more versatility in initial investment and earnings.
This information has kindly been provided by GNS China, a corporate and investment advisory firm that specialises in the China market. For further information, please contact GNS China at: info@gnschina.com or visit: www.gnschina.com.
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