New Sino foreign joint venture law | Pros and cons

Introduction

Sino foreign joint venture is a way for foreign investors to do business in China. However,  before the new Sino foreign joint venture implements, there are many conflicts among the three old law.

When disputes occur in enterprises, there is no uniform law that investors can use to solve the problems.

Therefore, on January 1, 2020, the “Foreign Investment Law” came into effect.

Meanwhile, China abolishes the old three laws related.

They are the “Sino foreign Joint Venture Law”, the “Foreign Investment Enterprise Law” and the “Sino-Foreign Cooperative Enterprise Law”.

Before understanding the new Sino foreign joint venture law, let’s review what SFJV is.

What is needed to create a Sino foreign joint venture?

Sino foreign joint venture (SJV) is a limited liability company. It is a company jointly established in China by Chinese and foreign companies. Moreover, it has a Chinese legal personality.

Besides, the board of directors of SFJV manages SFJV, and the Chinese and foreign parties respectively serve as chairman or vice-chairman.

Besides, in China, it can buy land, buildings and independently hire Chinese employees.

Investment requirements

Companies from abroad account for at least a quarter of the total investment. However, there is no minimum investment requirement for Chinese companies.

Companies can invest in cash, capital goods, industrial property rights, etc.

Besides, because SFJV is a limited liability company. Its investors are not liable for company debts.

After reviewing what SFJV is, let’s take a brief look at its taxation.

How is a Sino-foreign joint venture taxed?

Chinese law has the following provisions on the taxation of SFJV:

First, it needs to pay corporate income tax. This part of the tax is only levied on its gross profit

Secondly, for the following aspects, it is apportioned according to the proportion of the registered capital of the partners:

• Reserve funds stipulated in the articles of association
• Employee bonus
• Welfare Fund Enterprise Regulations
• After deducting the part in corporate regulations, the remaining net profit

Discount

SFJV can reduce or exempt taxes according to regulations.

Before the new Sino foreign joint venture law

Before the implementation of the new Sino foreign joint venture law, China implemented fork management on SFJV and Chinese companies.

Let’s take a look at the relevant provisions of SFJV before the new Sino foreign joint venture law.

Foreign Investment Regulation Before the Sino Foreign Joint-Venture Law

1. Before the new Sino foreign joint venture law, China did not have a unified law for SFJV. And foreign investors carried out the SFJV according to the three old laws.
2. The original foreign investment law stipulated that every foreign investment project should be approved by the relevant Chinese authorities before entering China.
3. The “Catalogue of Foreign Investment Industries” is a basic guide for the Chinese authorities to determine whether foreign investment projects can be approved.
4. It is divided into four industries: encouraged, permitted, restricted and prohibited.
5. The percentage of equity held by a foreign party in a joint venture can be subject to the restrictions. And this catalogue outlines the industry sectors that encourage, restrict and prohibit foreign investment. Generally speaking, restrictive industries stipulate that the Chinese party’s capital contribution ratio is 51%. And the foreign party’s capital contribution ratio is 49%. Joint ventures are not subject to this regulation but must register at least 25% of foreign capital.
6. And the joint venture should be a legal entity. So, the management of the entity, such as the board of directors, the board of supervisors and senior management, should get the approval through negotiations between the two parties. However, where the chairman of the board of directors is from one party of the joint venture, the other party of the joint venture shall be the vice president.

As a result, the governance of joint ventures is not as strictly as contracts determined. So, this will cause some disputes.

Then, after the implementation of the new Sino foreign joint venture law, what is the status quo of SFJV?

Implementing regulations

The new Sino foreign joint venture law implemented on January 1, 2020, unifies SFJV’s investment framework. Therefore, it leads a more stable, transparent, predictable and fair competition market environment.

Next, let’s take a look at the important content of the new Sino foreign joint venture law together.

Highlights of the Law

General principles of foreign investment regulations

For government procurement activities, SFJV and Chinese companies participate equally.

SFJV can also have benefited from China’s support and promotion policies like Chinese companies

Scope of application

The law allows SFJV to engage in the following investment activities:

• First, foreign investors invest independently in China
• Second, foreign businessmen and other investors jointly invest in China
• Third, foreign businessmen can purchase shares, equity, and property of Chinese companies.
• Fourth, foreign businessmen can invest in new projects in China. Meanwhile, foreign businessmen can also invest in new projects in China together with other investors.
• Fifth, foreign businessmen can also invest in other ways prescribed by law or the State Council.

Establishment of national treatment and negative lists

1. The new Sino foreign joint venture law formulates a new management system for the national treatment and negative lists.
2. At the stage of investment access, foreign investment not stipulated in thenew Sino foreign joint venture law is equivalent to domestic investment. And foreign businessmen only need to register and invest in relevant departments.
3. The new Sino foreign joint venture law replaces the “Catalogue of Foreign Investment Industries”.

Types of company

After the implementation of the new Sino foreign joint venture law, you can register SFJV as a limited liability company. And there is no need to distinguish to WFOE, SFJV, CJV. Moreover, the provisions of the “Chinese Company Law” also apply to SFJV.

Foreign exchange control

Profits of SFJV can enter and exit China freely, whether it is RMB or foreign currency.

Meanwhile, it can obtain the following compensation:

• Return on capital
• Profit
• Capital gains
• Other legal compensation

Requirements for local government

The new Sino foreign joint venture law requires local governments to fulfil their promises. Moreover, these commitments are according to contracts and laws.

Local governments cannot specify regulations that damage the rights and interests of SFJV. Moreover, it is not possible to stipulate that SFJV increases its obligations. And they can’t illegally interfere with normal production and operation activities of SFJV.

Intellectual Property Protection

China protects the intellectual property rights of foreign investors

Government agencies cannot force foreign investors to promise to transfer technology to China.

Investment from Hong Kong, Macao and Taiwan

Hong Kong, Macao and Taiwan investment is not a foreign investment, but a special domestic investment.

Therefore, the new Sino foreign joint venture law does not apply to Hong Kong, Macao and Taiwan investors investing in mainland China.

However, it can also manage the company according to the rules in the new Sino foreign joint venture law.

Other investment protection regulations

In addition to the important content mentioned above, the new Sino foreign joint venture law protects the interests of SFJV.

Besides, China does not levy SFJV. Except in special circumstances, or expropriation of public interest.

Difference between before and now

Share transfer to third parties

Before

Regarding the transfer of shares to a third party, the new Sino foreign joint venture law has more detailed requirements:

If the shareholders of SFJV transfer all or part of their shares, all parties in the transaction have the right of first refusal.

Moreover, the conditions for this transfer cannot be more favourable to others outside of SFJV.

And the transfer is invalid if it violates the regulation.

In the old law, shareholders can transfer their shares to others. However, a majority of other shareholders must approve this transfer.

For other shareholders who have not responded, if they give a response within 30 days after receiving the transfer notice, the company will also treat them as consent. If there are shareholders who disagree, they will buy this share.

But, if some shareholders do not give a reply, this is a serious obstacle to the equity transfer.

However, in response to this issue, China issued new regulations later.

But, this new regulation still does not clearly state the conditions for agreeing to transfer.

Therefore, the old law can easily cause disputes on the issue of transfer.

The formulation of the new Sino foreign joint venture law has given a better solution to this problem.

After

The formulation of the law has given a better solution to this problem.

Profit distribution

In terms of profit distribution, all parties in the company will distribute as much profit as their contribution to the registered capital. Therefore, if the company’s situation changes, this profit distribution situation is difficult to change.

After the implementation of the new law, all parties to the company can change the profit distribution by formulating the articles of association. And these allocations are all valid.

Insights

1. First, the law reduces market access thresholds. Moreover, itimproves the operating environment of foreign-invested enterprises.

After the implementation of the law, the threshold for foreign businessmen to enter the Chinese market is lower.

2. Second, the law will replace the scattered foreign investment system with a unified and comprehensive foreign investment system.
3. Third, the new law abolishes strict requirements on the structure of foreign companies. So, it makes foreign investors equal to domestic investors in the Chinese market. Meanwhile, it gives them equal protection.

Now, the new law also creates a friendlier and more effective market for foreign businessmen.

4. Fourth, the new law expands the scope of foreign investment. Therefore, they can engage in more industries. Meanwhile, it further opens up the market. Moreover, China allows foreign businessmen to engage in more industries in the form of a majority equity or sole proprietorship.
5. Fifth, the provisions of the new law on the transfer of shares to a third party are conducive to the resolution of disputes.
6. Sixth, profit distribution has also become more flexible.

Conclusion

As mentioned above, there are many conflicts in the implementation of the old law. Moreover, some contradictions have not been resolved.

After the implementation of the new law, conflicts have been resolved and the distribution of benefits has been improved.

Now, let’s summarize the main points of the new law.

1. First of all, Chinese and foreign businesses jointly participate in government procurement.
2. In addition, Chinese and foreign businesses enjoy China’s preferential policies and allergy treatment.
3. And then, the industry for foreign businessmen has been relaxed.
4. Besides, foreign businessmen do business in China no longer subdivide company types.
5. Conveniently, the profit part of the currency is free to enter and exit China.
6. At last, the Chinese government cannot interfere with foreign companies, nor can it forcefully claim intellectual property rights.

By the way, if you like this article, please share it with your friends.

If you want to know more about the Joint Venture, you can visit Joint Venture.