A. Types of Mainland Chinese business organisation – joint ventures, wholly foreign-owned enterprises and representative offices
The following information gives a brief introduction to the various forms of business organisation in Mainland China that can be run or invested in by foreigners. You should consult a lawyer who specialises in Mainland China if you have further queries concerning the establishment of a company in the Mainland.
All formal foreign businesses in Mainland China (including those invested by Hong Kong companies and individuals) are called foreign investment enterprises (FIEs) , and must be registered in the form of a Sino-foreign equity joint venture, a Sino-foreign cooperative joint venture or a wholly foreign-owned enterprise.
Sino-Foreign Equity Joint Ventures (EJV)
EJVs are established in accordance with the People's Republic of China (PRC) Sino-Foreign Equity Joint Venture Law 《中華人民共和國中外合資經營企業法》 and associated implementation regulations 《中華人民共和國中外合資經營企業法實施條例》 . An EJV is a limited liability entity with legal person status (that is, the company can sign contracts and sue or be sued by the others) . It is jointly invested in and managed by foreign and Chinese partners. The parties that are involved each contributes capital either in cash or in kind in such forms as equipment, right to use land and office or factory premises (subject to certain restrictions), and takes a shareholding in accordance with the percentage of equity that the party has invested. Each shareholder is entitled to receive dividends (after the EJV has complied with the relevant requirements) in proportion to its own equity share (note: the equity share of a shareholder is decided by the total investment of that shareholder, in cash or in kind, relative to the contribution of the other parties).
Sino-Foreign Cooperative Joint Ventures (CJV)
CJVs are established in accordance with the PRC Sino-Foreign Cooperative Joint Venture Law《中華人民共和國中外合作經營企業法》and associated implementation regulations《中華人民共和國中外合作經營企業法實施細則》. A CJV can be set up either:
- with each partner remaining a separate legal entity who bears liability in accordance with the relevant provisions of PRC civil law and with all of the partners cooperating to establish the joint management setup of the CJV; or
- with all of the partners putting in their investment and delegating non-investing staff to form a single company with limited liability.
The partners or shareholders can decide on the rate at which the investment is to be recovered, and profits can be shared irrespective of the level of capital contribution that is made by each party (subject to the CJV contract being approved by the relevant authorities and compliance with the relevant requirements). This means that, in contrast to an EJV, the profit/loss-sharing ratio of the shareholders in a CJV may not be equivalent to their respective investment ratio.
Wholly Foreign-Owned Enterprises (WFOE)
WFOEs are established in accordance with the Foreign-Owned Enterprise Law《中華人民共和國外資企業法》and associated implementation regulations《中華人民共和國外資企業法實施細則》. A WFOE is also a limited liability entity with legal person status, and the foreign investor can run the business without the involvement of a Chinese partner.
An advantage of joint ventures is that they give the foreign party access to the Chinese party's sales, marketing and distribution network, thus reducing the level of new investment that is required before business operation can begin. A CJV is a good option for scenarios in which foreign investment is restricted to less than 50% in equity but the foreign party wishes to recover a larger share of the joint venture's revenue. However, the foreign investor in a joint venture must obtain the consent of the Chinese party on major management decisions, and thus many foreign investors prefer to establish WFOEs if the option is available.
Some foreign companies choose to set up representative offices in China as a means of liaising with their customers and suppliers in Mainland China. These representative offices can also carry out market research and business promotion. However, they can only conduct business in Mainland China in the name of the foreign company that they represent and cannot issue invoices for the products and services that their company supplies in Mainland China.
Other types of organisation
To establish a company or office in Mainland China that can engage in business activities, a foreign company can establish a branch organisation in accordance with the PRC Company Law. However, the branch organisation does not have legal person status, which means the civil liability in any commercial dispute is borne by the head office.
An alternative for Hong Kong companies and individuals is to make arrangements to have portions of their processing and assembly operations carried out by factories in Mainland China or to establish a small domestic business in the name of a Mainland Chinese relative. However, these forms of doing business in Mainland China are governed by different sets of laws and regulations, and are in many ways restricted, as they do not have legal person status.
Since the Closer Economic Partnership Arrangement (CEPA) and its supplemental agreement 《內地與香港關於建立更緊密經貿關係的安排》補充協議 came into affect , Hong Kong companies or individuals have enjoyed preferential treatment and may invest in certain businesses in Mainland China in the form of a partnership under the PRC Partnership Law 《中華人民共和國合夥企業法》 or a sole proprietorship under the PRC Individual Enterprise Law 《中華人民共和國個人獨資企業法》 . However, these alternative forms of business organisation do not enjoy the benefits of limited liability.