Article reposted from No1 Law Firm blog. This is for information purposes only, do your due diligence in double checking accuracy. This website is not connected to any agent nor endorse them.
Foreign investment into China can be made via one of several types of foreign-invested entities (FIEs). Mainly include following investment structures:
In this article, No.1 will mainly discuss for “RO” (Representative office) and “JV” (Joint venture).
Representative office (RO)
The representative office, as the pioneer of foreign companies in China, generally exists as a liaison office of its foreign parent company. Its main role is to help the parent company to do some liaison, preparatory and auxiliary work in Mainland China.
In the preliminary stage of investment , foreign merchants are not familiar with the market in China. RO can test the market initially, explore business opportunities , expand corporate image and establish local partnerships.
RO can directly contact the foreign parent companies for regular commercial work like contract signing and delivery of goods, which serve as a monitor and for daily liaison of parent company.
RO does not possess an independent status of a legal person, and does not have full economic functions to engage in commercial activities of general significance.
RO cannot directly sign contracts with its suppliers or customers in its name, apply for independent import and export rights, apply for general taxpayer qualifications, hire employees independently, or open a letter of credit account at a bank, etc.
The expenses of the representative office must be from the remittance of the foreign parent company. What is more, it is difficult for the office to gain income and obtain invoices (except for special representative offices).
Advice from NO.1:
After the promulgation of Order No. 8 of the Ministry of Commerce in 2004, can it be said that foreign-funded trading companies have entered a period of rapid development.
While for RO, with strict control over high taxes, limited business scope, and residence applications , Chinese government is restricting the number of the representative offices ,which causes lots of representative offices applying for cancellation in the recent years.
Joint Venture (JV)
A joint venture (JV) is a limited liability company formed by a foreign investor(s) or a foreign individual, along with a partnered Chinese company. Both parties to the venture shall share the profits, risks and losses in proportion to their contributions to the registered capital. Generally, Chinese individuals are not qualified to invest in the JV. On the other hand, a minimum of 25% of the capital must be contributed by the foreign partner(s).
a. EJV (Equity Joint Venture)
Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned.
b. CJV (Cooperative Joint Venture)
In a Sino-Foreign Cooperative Venture (also known as Contractual Joint Venture), the parties involved may operate as separate legal entities and bear liabilities independently rather than as a single entity. A cooperative venture may also be registered as a limited liability entity resembling an equity joint venture in operation, structure, and status as a Chinese legal entity. There is no minimum foreign contribution required to initiate a cooperative venture, allowing a foreign company to take part in an enterprise where they preferred to remain a minor shareholder.
a.Enter foreign markets: For example, in the new joint automobile manufacturing company established by Toyota and General Motors, Toyota has gained practical knowledge to enter the US market, while GM has acquired Toyota's technology and management methods.
b.Complementary resources: The joint venture parties provide different resources to the joint venture, and the enterprise makes full use of these resources to improve the competitiveness.
a.Different objectives are easy to occur ;
b.Disclose of business secret ;
c. Profit distribution issues;
d. Communication issues.
Advice from NO.1
The joint venture may be established for only one project or plan, or it may continue to operate in the form of a joint venture like Sony Ericsson.
Unlike a joint venture , a strategic alliance has nothing to do with the company's equity, and is less formal in its form. Customers should consider carefully according to their actual needs.