8310992349AM1251703429141 - Establishment of a Joint...

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JV in China 1 July 2009 Establishment of a Joint Venture (JV) in China A joint venture (JV) is a business arrangement in which the joint venture partners create a new business entity or official contractual relationship, and share the investment & operational costs, management responsibilities, and profits & losses. During the roll out of China’s “Open Door” policy over nearly three decades ago, JVs were the initial investment vehicle used by foreign investors, not by choice but by obligation. At this time, the Central Government used JVs as a vehicle to transfer advanced technology and management techniques from foreign companies to state owned enterprises. In return, foreign investors benefited from access to markets and suppliers, as well as lower investment and operational costs. Although liberalization of foreign investment has led to alternative investment vehicles, such as WFOEs and FICEs, some projects still require the involvement of Chinese partners, thus forbidding WFOEs and limiting foreign investors to establishing JVs. There are two types of Joint Venture, the Equity Joint Venture (EJV) and Contractual Joint Venture (CJV). Both investment vehicles require the drafting and agreement of a joint venture contract between the foreign partner and the Chinese partner, specifying the responsibilities, rights and interests of each partner in detail. Whereas the EJV has this division in accordance with the ratio of equity interests, the division in a CJV is up to the partners to decide. I. Equity Joint Venture (EJV) The Equity Joint Venture (“EJV”) is probably the most common of the foreign investment vehicles in China. EJVs are governed by the Law of the People's Republic of China on EJVs Using Chinese and Foreign Investment. This was first promulgated in 1979, at which time it was the first law pertaining to foreign investment, and as such EJVs were the first investment vehicles used by foreign investors. EJVs must necessarily be established as limited liability companies, thus separate “legal persons” distinct from their investors, with the liability of the partners limited to the contributions made to the Registered Capital of the EJV. The Registered Capital must be paid up by the investors in the proportion agreed between them and set out in the relevant EJV contact. The EJV Law requires that the foreign partner to the venture contribute at least 25 percent of the Registered Capital for the EJV to achieve FIE status. There is usually no upper limit on the foreign partner's contributions (no more than 99%) except where Chinese law requires the Chinese partner to have a majority ownership (i.e. “restricted” industries). Profit is distributed in the form of dividend to the parties in proportion to each party's respective ownership interest. Capital contributions to an EJV must be made in cash, intellectual property rights, land use right,
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8310992349AM1251703429141 - Establishment of a Joint...

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