Coudert Brothers Global Legal Advisers Coudert Brothers LLP Global Legal Advisers www. coudert. com
Principal Forms of Foreign Investment Equity Joint Venture (EJV) Onshore Offshore Foreign Investor(s) Joint Venture Cooperative Joint Venture (CJV) Wholly Foreign Owned Enterprise Representative Office Coudert Brothers Global Legal Advisers 2
REPRESENTATIVE OFFICE Permitted Activities: • act as local base to reach customers • receive inquiries • conduct market research • develop contacts with Chinese government officials Requirements: • must have Chinese sponsor to assist with approval process (roughly 2 -month process) • must apply for reapproval every 3 years • chief representative at the office must be a resident of China (but may be foreign national) Pros: • relatively easy to set up and maintain compared to other FIEs Cons: • has no "legal person" status in China and cannot enter into contracts Coudert Brothers Global Legal Advisers 3
JOINT VENTURES (EQUITY OR COOPERATIVE) Pros: • • Chinese partner's connections with local government authorities Chinese partner's existing supply/sales channels and customer base Cons: • • Restrictions on transfers of foreign partner's equity stake Taking on existing operations and obligations of Chinese partner Requirements: • Constituent parties must consist of one or more Chinese entities and one or more foreign entities or individuals • 25% minimum foreign ownership requirement • Minimum registered capital requirements vis-à-vis total investment Other Characteristics: • Capital contribution can be cash, in-kind contributions (including intellectual property) • Capital contribution in the form of IP shall not exceed 20% of the JV's registered capital (35% in the case of a high technology project) • Contribution of IP requires Ministry of Commerce's approval if it is in the "restricted category"; all other IP requires only registration • Management vested in a board of directors the members of which are appointed by the investors based on the rough ratio of capital contributions (more flexibility in CJVs than EJVs) Coudert Brothers Global Legal Advisers 4
MAJOR DIFFERENCES BETWEEN EQUITY JOINT VENTURE AND COOPERATIVE JOINT VENTURE • JV contract of CJV may provide that invested capital be returned to investors during the term of the joint venture • Parties to EJV required to share profits in accordance with proportion of capital contributions; parties to CJV may share profits in manner as set forth in JV contract Coudert Brothers Global Legal Advisers 5
WHOLLY OWNED FOREIGN ENTERPRISES OLD: • Must be exported-oriented or technologically advanced enterprises NEW: • WOFEs are no longer required to state in its AOA that it will export a minimum percentage of its output MAIN CHARACTERISTICS OF WFOE • Has "legal person" status as a limited liability company • Owned solely by foreign investors • Approval process similar to a JV; but no need to negotiate with Chinese partner • Transfer of equity interest requires government approval • Distribution and allocation of dividends/profits is as agreed to among investors PROS: • • • No need to consider interests of local Chinese partner No need to take on existing obligations and operations of Chinese partner Foreign investors retain 100% control in management of enterprise CONS: • No readily available local knowledge and connections by Chinese partner • Cannot be utilized in certain industries where foreign ownership is limited (e. g. , telecommunications) Coudert Brothers Global Legal Advisers 6
GOVERNMENTAL APPROVAL FOR JVs AND WFOEs • Priority given to the project during the government approval process for the FIE depends on specific industry involved • Prohibited Category • Restricted Category • Encouraged Category (preferences granted) Examples are: water conserving irrigation equipment, railway technology, integrated circuit manufacturing • Everything else falls into the "Permitted Category", which are reviewed by and passed upon by the government on a case-by-case basis Coudert Brothers Global Legal Advisers 7
Establishment Procedures for FIEs Obtaining Requisite Pre-Approval (for certain projects only) Project Proposal Examined and Approved by MOFCOM/COFTEC Issuance of Approval Certificate (prepared by Chinese party) Examined and Approved by MOFCOM/COFTEC Registration with AIC Issuance of Business License (FIE Establishment Date) Feasibility Study Report (prepared by all parties) Reservation of the FIE Company Name Coudert Brothers Global Legal Advisers Examined and Approved by MOFCOM/COFTEC JV Contract and AOA, etc. Post-Establishment Matters Obtaining Company Seals Registration with Tax Bureau, Financial Bureau, Customs and SAFE, etc. Opening Bank Accounts 8
Minimum Requirement for Registered Capital of FIEs Total Investment Minimum Registered Capital (% of Total Investment) Up to US$3 million 70% US$3 -10 million 50% or US$2. 1 million (whichever is higher) US$10 -30 million 40% or US$5 million (whichever is higher) Over US$30 million 1/3 or US$12 million (whichever is higher) Coudert Brothers Global Legal Advisers 9
Registered Capital Contribution Schedule for JVs Contribution Method Registered Capital Lump-Sum Contribution No Limitations Time Limit within 6 months after the Business License is issued The first 15% to be contributed within 3 months after the issuance of the Business License; and the remaining 85% is subject to the following schedule: US$500, 000 or below within 1 year after the Business License is issued within 1. 5 years after the Business License is issued US$1 million – US$3 million within 2 years after the Business License is issued US$3 million – US$10 million Contribution in Installments US$500, 000 - US$1 million within 3 years after the Business License is issued Over US$10 million Coudert Brothers Global Legal Advisers determined by the relevant approval authority 10
Transferring Equity in a Joint Venture – Onshore New Owner Original Foreign Party Equity Consideration Original Owner Former Ownership Offshore China Chinese Party JV Coudert Brothers Global Legal Advisers 11
OTHER OPERATING ISSUES • Source of Supplies • Export Requirements • Technology Transfer • Labor Issues • Foreign Exchange Controls and Repatriation of Profits Coudert Brothers Global Legal Advisers 12
SUPPLY SOURCES • Prior Law: FIEs had discretion to determine whether to procure in China raw materials, equipment, office supplies, etc. , but had to give priority to a Chinese source where relevant conditions were the same. • Current Law: FIEs no longer required to give priority to Chinese sources so long as the decision regarding whether to procure in or outside of China is based on the principles of "fairness and reasonableness. " Coudert Brothers Global Legal Advisers 13
EXPORT REQUIREMENTS • WFOEs Prior Law: Export-oriented WFOEs were required to export at least 50% of its annual products and to set forth such minimum percentage in its AOA Current Law: WFOEs no longer subject to export requirements as a pre-condition to establishment • JOINT VENTURES Current Law: Neither CJVs or EJVs are required to sell products outside of China Current Practice: To improve export performance, many local governments have in practice required a stipulation in the JV Contract that a stated percentage of the JV's products be exported 14 Coudert Brothers Global Legal Advisers
TECHNOLOGY TRANSFERS Two Alternatives for transferring technology to the FIE by the foreign investor • Transfer Technology as Registered Capital Contribution • Must not exceed 20% of the FIE's registered capital (35% in the case of a high technology project) • Transfer of the technology requires government approval and valuation by the government • License the Technology to the FIE • Whereas all technology import contracts used to require government approval, only technologies that are on the "restricted" list now require approval • Technology import contracts for all "non-restricted" technology merely require registration with the government • The technology import contract is not valid until the relevant authority has issued the "technology import permit" • The provider of the technology is required to guarantee that the technology is complete, effective, and capable of accomplishing the goals set forth in the technology contract Coudert Brothers Global Legal Advisers 15
LABOR ISSUES • All Chinese "legal persons" required to enter into employment agreements with their employees which must address the following: 1. 2. 3. 4. 5. job duties wages term of contract work conditions for termination of contract • Employers required to pay into welfare and pension funds for each employee (an amount equal to roughly 50% of employee's base wage plus bonuses) • Severance pay equal to 1 month's pay for each year of service • Foreign nationals can be hired only if there is a special need and no available local candidate in China Coudert Brothers Global Legal Advisers 16
FOREIGN EXCHANGE CONTROLS AND REPATRIATION OF RMB PROFITS • RMB now fully convertible on current account basis • Examples of "Current Account" items include revenue or expenditures derived from import/export of goods and services, fees or royalties on intangible assets • Must submit documents to authenticity of the commercial transactions to the designated foreign exchange bank • Examples of "Capital Account" items include investments, loans, issuance of shares, income from sale of real estate • Capital Account items subject to substantive and discretionary review by SAFE • Repatriation of profits out of China • No legal restrictions • Requirements: • • • distribution Must have paid all registered capital requirements of the FIE Must have paid all relevant taxes Documents to be presented to SAFE: • FIE's board resolutions authorizing such profit the current year Coudert Brothers Global Legal Advisers administrative and procedural rather than • • Proof of tax payments and tax returns by FIE Audited financials regarding profits / dividends for • • FIE's foreign exchange registration certificate Review and approval process by SAFE is 17
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