Forms of foreign investment
Updated: 2019-12-31 Print
Chinese-Foreign Equity Joint Ventures, Chinese-Foreign Cooperative Joint Ventures, and Wholly Foreign-Owned Enterprises are the three main forms of foreign investment in China. Other investment forms include Joint Stock Limited Companies with Foreign Investment, Foreign Investment Companies, Chinese-Foreign Cooperative Exploitation, and BOT.
Chinese-Foreign Equity Joint Ventures
The Chinese-Foreign Equity Joint Venture is formed in China with joint capital from both Chinese and foreign companies, other economic organizations or individuals in accordance with the Law of the People's Republic of China on Chinese Foreign Equity Joint Ventures and its implementation regulations. The parties of the Chinese-Foreign Equity Joint Venture invest and operate jointly, and share the profits and losses in proportion to their respective shares of the registered capital. A Chinese-Foreign Equity Joint Venture is a limited liability company which has the status of a Chinese legal person. In general, the capital from the foreign party must not be less than 25% of the total. The partner may make capital contribution in currency or in non-currency property that may be valued in currency such as buildings, workshops, machinery and other physical objects, as well as in industrial property rights, proprietary technology, and land occupancy rights. The profits and other legitimate interest of foreign investors can be remitted out of the country or reinvested in China.
Chinese-Foreign Cooperative Joint Ventures
The Chinese-Foreign Cooperative Joint Venture, also called the Chinese-foreign contractual joint venture, is formed within the Chinese territory by foreign companies, enterprises, other economic organizations or individuals and Chinese companies, enterprises, other economic organizations or individuals in accordance with the Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures and its implementation regulations.
The parties to a contractual joint venture should clearly prescribe in the contract their respective conditions, rights, obligations, profit distribution, responsibilities for risks and debts, the company's management mode and property disposal upon expiration of the venture. When establishing China-Foreign Contractual Joint Ventures, the foreign party usually provides all or most of the capital, technology and key equipment while the Chinese party provides land use rights, existing plants and facilities, or a certain amount of capital.
Upon the expiration of the contractual joint venture stipulated in the contract, all the fixed assets of the contractual joint venture shall be returned gratis to the Chinese party; the foreign party may, within the period of the venture’s operation, apply to recoup its capital outlay in advance in the following ways:
(1) By reaching agreement in the contract of the contractual joint venture to enlarge the foreign party's proportion in the distribution of earnings on the basis of distribution according to the investment or conditions the foreign party provided for cooperation;
(2) By approval by the financial and tax authorities in accordance with relevant tax provisions of the State to recoup its capital outlay prior to the payment of income tax by the contractual joint venture;
(3) By recouping its capital outlay by other methods approved by the financial and tax authorities and other examination and approval authorities.
If the foreign party recoups its capital outlay in advance during the period of the venture's operation according to the provisions mentioned in the preceding paragraph, the Chinese and foreign parties shall be liable for the debts of the contractual joint venture according to the provisions of the relevant laws and the agreement in the contractual joint venture contract.
The Chinese-Foreign Cooperative Joint Venture may or may not possess the status of a legal person. A contractual joint venture which has legally attained the status of a Chinese legal person is a limited liability company. The parties to the venture shall bear liability for the contractual joint venture to the extent of their investment or in accordance with agreed conditions for cooperation in the contract. The contractual joint venture shall be liable for covering the debts of the venture with all its assets.
Wholly Foreign-Owned Enterprises
The Wholly Foreign-Owned Enterprise is invested entirely by foreign companies, enterprises, other economic organizations or individuals within the Chinese territory in accordance with the Law of the People's Republic of China on Wholly Foreign-Owned Enterprises and its implementation rules, and does not include branch offices established by foreign enterprises and other economic entities in China.
A wholly foreign-owned enterprise that meets the conditions for legal personality under the relevant Chinese laws shall obtain such status in accordance with the law. The organizational form of a foreign-capital enterprise shall be a limited liability company. Upon approval, the enterprise may also take any other liability form. With respect to a foreign-capital enterprise which is a limited liability company, the liability of the foreign investor to the enterprise shall be limited to the amount of investment subscribed and contributed to the enterprise by the investor. With respect to a foreign-capital enterprise which takes any other liability form, the liability of the foreign investor to the enterprise shall be dealt with in accordance with the provisions of Chinese laws and regulations.
Joint Stock Limited Companies with Foreign Investment
Joint Stock Limited Companies with Foreign Investment are companies set up within the Chinese territory by foreign companies, enterprises, or other economic organizations and Chinese companies, enterprises or other economic organizations on the principle of equality and mutual benefit and through subscribing for a certain proportion of stock. Foreign investors may also acquire A-shares of the PRC listed companies through medium and long-term strategic mergers and acquisitions under relevant laws and regulations.
The total capital of a joint stock limited company with foreign Investment is made up of different types of shares. Each stockholder takes certain responsibility for the company in accordance with the number of shares subscribed, and the company is responsible for debts with all its assets. The company is one of the forms of enterprises with foreign investment and is governed by the state according to the relevant laws and regulations concerning enterprises with foreign investment.
Foreign Investment Companies
Foreign investment companies are Chinese-foreign equity joint ventures or wholly foreign-owned enterprises within the Chinese territory that deal with direct investment. They take the form of limited liability companies.
The foreign investor who applies to establish a foreign investment company must enjoy good capital credit, sufficient economic strength for setting up an investment company, and meet either of the following conditions: A. its total registered assets must be at least US$400 million in the year prior to the application; the investor should have already established a foreign-invested enterprise within the territory of China and the amount of the investor's paid-in capital contribution to the registered capital thereof must exceed US$10million; or B. it should have already established more than ten foreign-invested enterprises within the territory of China, and the total amount of the investor's paid-in capital contribution to the registered capital thereof must exceed US $30 million.
Upon the approval of the Chinese government, a Foreign Investment Company enjoys a broader scope of business than other foreign-invested companies in an attempt to encourage overseas companies to carry out investment plans in China. At present, Foreign Investment Companies can invest in those fields of industry, agriculture, infrastructure and energy that the country encourages and permits.
Foreign-invested Venture Investment Enterprises
The term "venture investment" refers to an investment method consisting of equity investment, principally in unlisted high-tech enterprises (Investees), and start-up management services to such enterprises in order to obtain gains in the form of capital appreciation. The term "Foreign-invested Venture Investment Enterprise" (Venture Investment Enterprise) refers to a foreign-invested enterprise that is established in China by foreign investors or by both foreign investors and companies, enterprises or other economic organizations that are registered and established according to Chinese law (Chinese Investors). Pursuant to the Administration of Foreign-Invested Venture Investment Enterprises Provisions, the Venture Investment Enterprise engages in venture investment business activities.
The Venture Investment Enterprise may take the organizational form of a non-legal person entity or a company. The investors of a Venture Investment Enterprise that takes the organizational form of a non-legal person entity (Non-legal Person Venture Investment Enterprises) shall undertake joint and several liability for the debts of the Venture Investment Enterprise. The investors of a Non-legal Person Venture Investment Enterprise may agree in the contract for Venture Investment Enterprise that the requisite investors with venture investment as their main line of business shall undertake joint and several liability when the assets of the Non-legal Person Venture Investment Enterprise are insufficient to discharge the debts, and that the liability of other investors shall be limited to the amount of capital contribution to which they subscribed.
The establishment of a Venture Investment Enterprise shall satisfy the following conditions: (1). The number of investors shall be more than two and less than 50, and there shall be at least one requisite investor that has venture investment as its main line of business; (2). The minimum amount of capital contribution to which the investors of a Non-legal Person Venture Investment Enterprise subscribed shall be US$10 million, and the minimum amount of capital contribution to which the investors of a Corporate Venture Investment Enterprise subscribed shall be US$5 million. Except for the requisite investors, the minimum amount of capital contribution to which each of the other investors subscribed may not be less than US$1 million. Foreign Investors shall make their capital contributions in a freely convertible currency, whereas Chinese Investors shall make their capital contributions in Renminbi.
Chinese-Foreign Cooperative Exploitation
The term Chinese-Foreign Cooperative Exploitation means that a Chinese company and a foreign company sign a venture contract to carry out joint exploration and development of petroleum and mineral resources onshore and offshore. It is a widely-used form of economic cooperation in natural resources throughout the world. The striking features of the Cooperative Exploitation are high risk, high investment, and high return. Cooperative Exploitation is usually carried out in three phases: exploration, development and production.
The form of BOT is that the investor takes charge of a certain industrial or infrastructure project in the host country, taking responsibility for its construction, operation, maintenance and transfer. The investor, within an agreed period, must run the facilities, and shall recoup its investment and expenses in operation, maintenance and other aspects in the project. At the termination of the contract, the ownership of the project will be transferred to the local government. In China, BOT is used in development of projects such as freeways, powerhouses, and sewage treatment plants.