Custom essays on Joint Ventures

Nowadays, joint ventures are the oldest and most popular forms of FDI in China’s economy. In accordance with the law of China, there are 2 types of joint ventures: equity joint ventures (EJVs) and cooperative (or contractual) joint ventures (CJVs) (Wang 2007: 355-375). The activities of joint ventures are based on the Joint Venture Agreement and the Charter, and are governed by different laws (the Law of the PRC on Chinese-Foreign Equity Joint Ventures (ed.2001) and the Law of the PRC on Enterprises on Chinese-Foreign Cooperative Joint Ventures (ed. 2000) (Luo Y 2002: 127-151).
Creation of such enterprises with foreign investment is conducted in three phases (Luo J 2001: 277-285; Recent Chinese Legislation 2010: 95-101): 1) Prior approval by the Ministry of Commerce in order to determine whether the created company meets the requirements of legislation and policies of China in attracting FDI. The stage takes 3 months and results in the obtainment of the Certificate of Approval; 2) Registration by the authorities of Industrial and Commercial Administration, which takes 5-30 days and results in the obtainment of certificate of right to business activity in the PRC; 3) Post-registration procedure include registration of a company in various governmental agencies (the police, the Office of Quality Supervision, tax authorities, the Department of Statistics, the Ministry of Labor and Social Security, etc).
EJVs are established in a form of limited liability companies; each party makes investment in the JV in accordance with the amount of its contribution to the basic capital. CJVs can function both in a form of limited liability companies and without a legal entity. In this case, company’s responsibility is unlimited, but it is divided between the parties in proportion to their contributions to the company (Wang 2007: 355-375). Such organizations are managed by the joint management committee, not the board of directors.
The status of a legal entity in China provides an opportunity to own, use and dispose the property, the ability to independently manage economic activities as well as the opportunity to be a plaintiff and a defendant in court (Chen 1997: 151-171). Thus, EJVs are used to organize joint work for longer periods and with larger amounts of investments, while CJVs are usually created in cases when a foreign party makes an investment in the company of a Chinese producer and wants to get some control over the use of these funds and the distribution of profits (Newburry 2003: 395-419; Wang Y 2007: 75-90).
In current conditions, EJVs have a more strict regulation of their contractual structure, which gives a higher degree of security of capital, although this security is rather set by the governmental regulation. CJVs have greater freedom in determining the contractual obligations of each party (Newburry 2003: 395-419).
Typically, joint venture longevity doesn’t exceed 25-30 years and can be extended with the consent of all the participants and compliance of enterprise’s activities to the policy of China in attracting FDI. However, the longevity of CJVs is usually shorter than that of EJVs (Kivela 2005:125-152).
Investing in any form of joint venture should be either in cash form or in the form of other property, such as buildings, equipment, materials, and know-how. The foreign investor can make up to 70% of the total investment in the form of tangible assets or intellectual property, but the rest must be paid in cash (Mockler 2002: 1-24). In EJVs, this process of evaluation of property is under the strict supervision of independent experts whose task is to define that certain cost of the property does not exceed the price on the world market. At the same time, CJVs should have their own terms of investment cooperation with the corresponding evaluation, i.e. such joint ventures may decide on their own, in which way the value of their contributions will be determined. Moreover, the parties in CJVs can use the so-called “terms of cooperation” as investments, which gives greater freedom in the formation of such joint ventures. Usually in such cases, the Chinese side provides assets such as land or buildings without legal transfer of this property into the ownership of a JV (Bishop 2007: 89-103). However, this property may be regarded as assets of the company in matters of liability for any debts (Chen 1997: 151-171).
The value of the contributions of each party in the basic capital of EJVs determines the composition of the Board of Directors of the company and the proportion of profit distribution between the parties. The minimum contribution of the foreign party in the basic capital of such enterprises makes 25%; the size of the maximum contribution is not set. In the capital of CJVs, the foreign party may have a maximum share in an amount not exceeding 50% of the authorized fund (Hughes 2002: 205-224).
An EJV should have a two-level management structure presented by the board of directors and executive body, working under the contract (usually the CEO and his two deputies). CJVs can be controlled only by the board (or management committee, if a company is not a legal entity). However, on the agreement of the parties, CJVs may also have an executive body (Liu 2008: 259-270).
The board of directors or joint management body should consist of minimum three members, elected for a term not exceeding 3 years. The number of representatives of each party in the board of directors of EJVs strictly corresponds to their share in the basic capital; in CJVs this issue is determined at the agreement between the parties. However, if the chairman is a foreign party, his deputy must be nominated by the Chinese party and vice versa. The quorum for a meeting of the board of directors makes 2/3 of the total number of its members (Yan 2007: 788-807).
Another indispensable attribute of a limited liability company is the audit committee or auditor. Their task is to monitor management’s actions in order to ensure the compliance with legal requirements of China and the rights of owners, including the prevention of violations of the rights of the foreign party by the Chinese party and vice versa.
In equity joint ventures, each investor has the right to receive profits in proportion to his equity contribution. The foreign party may withdraw it profits abroad after passing the enterprise audit and payment of all the required taxes. China, however, provides certain tax benefits to foreign investors who leave funds in China or reinvest profits earned in China (Tung 200: 105-135).
In cooperative joint ventures, the size of the distributable profit may not be associated with the size of investments. In this regard, the foreign partner may have a smaller stake in the company than the Chinese partner (e.g., such requirements exist for the activity in such spheres as advertising, telecommunications, real estate, transportation), but receive a higher percentage of profits (Amtmann 2007: 145-48). Profits of CJVs can also be distributed in the form of final products of business. In CJVs (but not in EJVs), investments made by the foreign party are allowed to be returned to it in the form of additional payments during the enterprise longevity. This can be a great advantage, when a foreign party uses borrowed capital to finance the enterprise. The compromise in this case lies in the fact that the Chinese party will be entitled to all assets of the company after the expiration of the joint venture (Newburry 2003: 395-419; Wang Y 2007: 75-90).
The Chinese side of a JV often applies granting of the right to land use as the investment in the company. It should be noted that in China there are two forms of land use rights – “provided” and “accommodation” right. “Provided” right lies in the fact that the state issues a certificate for a concrete joint venture, in this case the land is seen as an asset owned by both parties in proportion to their shares. “Accommodation” means the right to land use usually stays with the Chinese side, not foreign investor. There is also the possibility of conversion of one right to another through the local Land Committee of the State Land Office (Bishop 2007: 89-103; Amtmann 2007: 132-136).
Taxation of JVs includes (Zuo 2006: 115-123; Tung 200: 105-135): 1) Income tax. According to the new edition of China Law on corporate profit tax entered into force on January 1, 2008, the total tax rate is set at the level of 25%. For so-called “low-yield small business”, tax rate makes 20%, and for the enterprises of new and high technologies supported by the state – 15% (Tsang 2009: 757-766). 2) Tax on individual income of employees. 3) Companies selling products of either their own production and purchased from third party in China are the payers of value added tax. The total tax rate is 17%. For taxpayers engaged in the sale of certain products relating to preferential categories (cereals and edible vegetable oils; plumbing and heating water; coal, liquefied petroleum and natural gas, methane; stone and charcoal for household use; books, newspapers and magazines; feed chemical fertilizers, agricultural chemicals and machinery, etc), it makes 13%. For taxpayers with the small turnover, VAT makes 3% since January 1, 2009. VAT is not charged at exporting goods, except specific cases regulated by the PRC Government. 4) Companies providing services in the PRC, passing the right to intellectual property is payers of business activities tax. The tax rate is 5% or 3% for most types of services provided; the basis for calculating the tax is the amount of profits from the sale of services (Stender 2009: 81-95).
During the implementation of the policy of openness and reform in China, there was a large number of areas with special economic status – free economic zones, where lowered income tax rates acted supporting enterprises with foreign investment (Chen 1997: 151-171). From January 1, 2008, territorial tax credits are repealed for newly established enterprises, and the decrease in taxation is only possible for enterprises of new and high technologies and low-yield small businesses (Stewart 2009: 167-179). In Western China, the preferential income tax rates were valid until 2010 (Shi 2001: 187-96; Tung 200: 105-135).
Thus, joint ventures are complex investment vehicles. A foreign investor starting his business in China should have complete knowledge and understanding of Chinese law in order to build relationships inside the joint venture according to his needs, and in accordance with long-term plans and relationships with Chinese partners (Yang 2002: 98-109). As practice shows, at the conditions of foreign investment in joint ventures in the form of advanced technology, the Chinese side often finds evidence of loss-making activities, and the joint venture gets closed, while all the know-how are taken by the Chinese side, which then uses the experience and knowledge safely and independently (Tsang 2009: 757-766; Stewart 2009: 167-179; Chan 2006: 47). Therefore, entering into such business, foreign investors should know that qualified legal assistance on these matters is of first importance (Yang 2002: 98-109).