Foreign Enterprise Registration
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Foreign Enterprise Registration according to the current classification by SAIC, foreign direct investment in China is divided into four categories, namely Sino-Foreign equity joint venture , Sino-Foreign Co-operative Joint Venture ,Wholly Foreign Owned Enterprises and Foreign-Funded Companies Limited by shares .
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Foreign Enterprise Registration-Allow access to restricted sectors of CJV
In a CJV, Chinese partners can hold and “lend” assets and licenses that are forbidden to foreign investors under PRC law or that are undesired by the foreign partner, until the venture terminates or foreign ownership rules are relaxed. Undesirable assets may include those with a high transfer tax, or those that are too complicated or costly for the foreign investor to obtain, such as land. For example, a Chinese company can “lend” its license to a CJV in a value-added telecom network (see The Ups and Downs of Telecom and Internet Ventures).
A Chinese company would not be permitted to transfer such a license to an EJV because the license, if forbidden to foreign owners, would be considered part of the whole company’s assets. A CJV could also allow negotiated levels of management and financial control, as well as methods of recourse associated with equipment leases and service contracts; in an EJV, foreign investors cannot always obtain such control since EJVs typically rely on equity levels to assign board seats and key staff and to determine other rights.
Foreign Enterprise Registration-Alleviate capital contribution difficulties of CJV
The CJV’s foreign partner can contribute or lease to the joint venture expensive Western technology and equipment, such as medical diagnostic equipment. The CJV can then repay the foreign partner at an “advanced rate” from revenues before profit sharing. This strategy can be used in sectors in which the law caps foreign ownership and when the Chinese partner cannot afford to fund assets up front. Under an EJV ownership structure, such an arrangement is impractical or impossible unless the Chinese side can contribute the amount of cash or assets needed to fund its equity up to the minimum Chinese ownership level required.
Foreign Enterprise Registration-Reduce risk of CJV
The CJV structure also tends to force partners to address rights and responsibilities in advance. The PRC government must approve all CJV investments to determine that the venture may legally engage in the specified business scope. Government approval of detailed CJV contracts has the added benefit of sanctioning the detailed agreements and deterring local partner noncompliance. Thus, CJV contracts commonly provide better recourse than EJV contracts if one partner fails to comply with agreements.
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