How do Sino-foreign joint ventures set up subsidiaries?

As China becomes more and more powerful in the global economy, enterprises need to consider the prospect of doing business in its territory. In order to develop business relations with enterprises in China or China, foreign investors, including financial investors and entrepreneurs, should consider setting up subsidiaries in China. The relevant information provided in this paper will provide foreign investors with guidelines for establishment and eliminate doubts about the establishment process. Businessmen who set up a China subsidiary in China in order to develop long-term business in China should consider setting up a subsidiary in China. Although foreign companies can sign some commercial contracts with China enterprises, such as sales contracts, licensing agreements and distribution agreements, they cannot directly conduct business in China without an approved business license. Operating through subsidiaries is at least beneficial-and sometimes necessary-to overcome some legal or commercial restrictions against foreign companies. Some foreign companies may have established permanent offices in China. This kind of office acts as a liaison office within the parent company. However, these representative offices cannot directly conduct business in China, because according to the laws of China, the resident offices are not independent legal persons and do not bear independent civil liabilities to third parties, so they have no right to conduct major commercial activities, such as signing commercial contracts with third parties. In addition, the office cannot directly employ local staff in China. However, there are exceptions to these restrictions. For example, offices can sign non-operating contracts such as office space lease contracts. Enterprises that intend to invest directly in China, employ local employees, conduct research and development, manufacture products and directly sell their products or services in China should consider setting up a subsidiary in China. Form of Establishment of Subsidiary The term "subsidiary in China" as mentioned in this article refers to an entity ("foreign investor") whose at least one shareholder is a foreign entity established outside China or an individual who is not a citizen of China. China usually refers to such subsidiaries as "foreign-invested enterprises". The shareholding ratio of foreign investors in foreign-invested enterprises is generally not less than 25%. If all shareholders of a company are registered in China or citizens of China, the company is a domestic-funded enterprise rather than a foreign-invested enterprise. Although both foreign-invested enterprises and domestic-funded enterprises are under the jurisdiction of China's Company Law, foreign-invested enterprises are also under the jurisdiction of relevant laws specially formulated for foreign-invested enterprises, so in fact, foreign-invested enterprises follow laws and regulations attached to or different from domestic-funded enterprises in many aspects. In some business areas that restrict foreign investors from entering, such as telecommunications services and network content providers, even if foreign-invested enterprises are allowed to enter, there are still many thresholds, such as setting a ceiling on the shares held by foreign investors (which means that foreign investors must establish joint ventures with China), attaching requirements to their investor qualifications, and/or the approval procedures for setting up foreign-invested enterprises are usually longer. In this case, foreign investors usually do not set up foreign-invested enterprises, but let individuals or entities associated with China set up purely domestic enterprises, or set up purely domestic enterprises in the above way while allowing or encouraging foreign-invested enterprises in the industry. This structure usually establishes relevant contractual arrangements between foreign investors, their unrestricted foreign-invested enterprises and domestic-funded enterprises in China. This flexible contractual arrangement with relevant domestic enterprises can help foreign investors achieve their business goals faster and more effectively. Foreign-invested enterprises can be established in the following four forms: 1. Wholly foreign-owned enterprises (wholly foreign-owned enterprises); 2. Sino-foreign joint ventures (joint ventures); 3. Chinese-foreign cooperative enterprises (cooperative enterprises); Fourth. Sino-foreign joint stock company (joint stock company). China said that the first three types of enterprises are called limited liability companies, although the shareholders of joint-stock companies also bear limited liability according to their subscribed shares. Joint-stock companies require foreign investors to hold more than 25% shares, which is not as common as the other three forms. Foreign investors tend to choose the first three forms of establishment. The main reason is that the establishment of foreign-invested enterprises in the form of joint-stock companies requires the approval of the Ministry of Commerce, which takes a long time, and the minimum investment of joint-stock companies is higher than other forms. In addition, the shares held by the promoters of a joint-stock company shall not be transferred within three years after the establishment of the company. Therefore, unless China's subsidiary intends to be listed on the China stock market in the near future, most foreign investors will choose to set up wholly-owned enterprises, joint ventures or cooperative enterprises. Foreign investors should choose between wholly-owned enterprises and joint ventures and cooperative enterprises according to their own business models and conditions, unless the industry in which foreign-invested enterprises are located restricts the form of establishing wholly-owned enterprises. At present, if the industry allows wholly-owned enterprises, foreign investors may prefer to choose wholly-owned enterprises. If foreign investors especially need to rely on local support in land, factories, equipment and local sales and marketing channels, and China can also assist foreign-invested enterprises in these areas, foreign investors can also consider joint ventures and cooperative structures. However, since many foreign investors are already familiar with the market and business environment in China, if they can get local support by hiring local competent employees, they can also take the form of sole proprietorship. In addition, China government departments have become more and more accustomed to direct communication with foreign companies. For the above reasons, wholly-owned enterprises that rely on local resources and channels may not necessarily have disadvantages. Moreover, the parent company of a sole proprietorship enterprise is more flexible in controlling the sole proprietorship enterprise, controlling its intellectual property rights, and making contractual arrangements with the sole proprietorship enterprise and withdrawing from the sole proprietorship enterprise. In addition to newly established foreign-invested enterprises, foreign investors can also set up subsidiaries by acquiring existing foreign-invested enterprises or domestic-funded enterprises, and the acquired enterprises will become wholly-owned enterprises or joint ventures and cooperative enterprises. From the perspective of China law, the examination and approval procedures and treatment of foreign-invested enterprises in China are not directly related to the nationality of foreign investors or the country of company registration. No matter where foreign investors are established-in Cayman or in the United States, they need to go through the same examination and approval procedures, abide by the same laws and regulations and enjoy the same treatment. Investors from Hongkong, Macau and Taiwan Province Province who invest and set up enterprises in Chinese mainland are also regarded as foreign investors and enjoy the treatment of foreign investors. Of course, depending on whether China has signed a bilateral tax treaty with the investor's country, different countries have different tax impacts on foreign investors. In addition, when determining the founder and location of the subsidiary, foreign investors must make plans for future withdrawal. Therefore, foreign investors must first determine their overseas institutions and plan the impact of the laws of the jurisdiction on their taxes. Qualified talent pool is one of the main factors to decide where to set up a subsidiary. Universities are suitable for high-tech companies to seek qualified R&D talents. Therefore, China's two largest cities, Beijing and Shanghai, naturally become gathering places for high-tech companies. Such as Jiangsu, Zhejiang, Sichuan, Guangdong and other developed areas also have a large number of high-tech talents. Similarly, production subsidiaries can consider establishing factories and distribution institutions in labor-intensive areas. In China, it is very important to maintain relations with local governments and enterprises. Therefore, many investors will look for a place where they can often communicate closely with local governments and enterprises, or prefer to set up subsidiaries in areas where they can hire competent managers and good local networks. Good relations now are not necessarily black-box operations, but communication and communication. A good relationship is conducive to the rapid and smooth operation of subsidiaries. Many cities and regions have established industrial science parks and offered various concessions to attract investors to invest in them. Tax preferences, mainly income tax and import tax, depend on the nature of the park and foreign-invested enterprises. Except for local taxes and fees, all major foreign-funded enterprises pay taxes according to national standards. Investors need to ensure that the park they choose should be officially recognized by the state. As for which city to choose, foreign-funded enterprises need to examine many other important factors, such as human resources, local support, relationships, transportation, infrastructure and so on. The establishment procedures and approximate expenses of foreign-invested enterprises shall be approved by the Ministry of Commerce or the competent commercial departments of provinces and cities (collectively referred to as the "examination and approval authorities"). The examination and approval authority shall determine the examination and approval authority of foreign-invested enterprises according to the total investment of foreign-invested enterprises and the nature of the industries to be engaged in. Because the approval of the central government takes a long time, foreign investors prefer that their subsidiaries be approved by local governments. At present, most foreign-invested enterprises can be examined and approved by the relevant departments of provinces and cities. Without specific legal restrictions, foreign-invested enterprises can be approved and registered within one month after all the required documents are prepared and submitted to the local examination and approval authorities. Once approved, a foreign-invested enterprise must register with the State Administration for Industry and Commerce or the corresponding departments at the provincial and municipal levels (collectively referred to as the "registration authority"). The registration authority shall issue a business license to a foreign-invested enterprise, and the foreign-invested enterprise shall be deemed to be established according to law from the date of issuance. China law divides foreign-invested industries into the following four categories: 1) encouragement category; 2) Allow; 3) restrictions; Or 4) prohibition. After joining the WTO, China relaxed the restrictions on foreign-invested industries. The main expenses for establishing a foreign-invested enterprise include registration fees, announcement fees and registered capital. According to the registered capital, the registration fee and announcement fee collected by the registration authority total about 1000 to 3,000 USD. The more foreign-invested enterprises invest, the higher the cost, but the total cost does not exceed 8 thousand dollars. Generally speaking, for foreign investors, the biggest expenditure is registered capital (which also determines the registration fee and announcement fee collected by the government). The laws of China require shareholders to pay their capital contribution in cash or in kind. All shareholders of a foreign-invested enterprise shall, according to the establishment documents, subscribe for the registered capital in proportion to their respective ownership, and pay it in full within a certain period of time after the establishment of the foreign-invested enterprise. The first investment shall be made within 90 days after the issuance of the business license, and the amount shall not be less than 15% of the registered capital. Management laws have the same minimum registered capital requirements for foreign-invested enterprises, while local governments have different requirements in practice. For example, Shanghai stipulates that the minimum registered capital of production-oriented foreign-invested enterprises is 200,000 US dollars, and the minimum registered capital of service industry is140,000 US dollars; In Beijing, foreign exchange equivalent to 500,000 RMB (slightly more than 60,000 US dollars) is acceptable. In addition, since the registered capital is only paid within the time stipulated in the establishment document, investors can pay their capital contribution in installments relatively flexibly, but investors of foreign-invested enterprises must pay their registered capital in full within three years after the establishment of the enterprise. Hire local service agencies in China and have authorized agencies to help foreign investors set up foreign-invested enterprises. These agents can prepare the establishment documents and communicate with the examination and approval registration authority. This will help investors to speed up the establishment process. However, because most local governments are very willing to attract foreign investment, the approval of foreign-funded enterprises without special circumstances is procedural. Many investors realize that they can go through the approval process even without the help of an intermediary. Lawyers can also help clients get approval and registration from government agencies. Sometimes, lawyers can provide customers with more economical and efficient services by cooperating with authorized agencies: the agency is responsible for daily communication with government agencies, while lawyers ensure the correct implementation of all legal documents and approval procedures. Considering the cost, many investors are reluctant to set up foreign-invested enterprises with the help of lawyers at the initial stage. However, the cost of hiring a lawyer or a service agent is not necessarily expensive. Getting advice on the best legal structure from China lawyers may be beneficial to future negotiations and financing, especially if investors intend to make special contractual arrangements for foreign-invested enterprises or put forward special requirements for the operation of foreign-invested enterprises. Control of subsidiaries The highest authority of a domestic limited liability company is the shareholders' meeting. Unlike this, the board of directors is the highest authority in joint ventures and cooperative enterprises, and decides all major matters of joint ventures and cooperative enterprises. Directors are appointed by shareholders. According to the specific situation, how to stipulate and balance the power between the board of directors and the management can be flexibly arranged in the establishment document. Wholly-owned enterprises are more flexible in setting up, stipulating the division of powers and managing teams. In addition to being dominated by the board of directors, the parent company can also establish some arrangements between it and its subsidiaries to control the subsidiaries. More commonly, the parent company owns key intellectual property rights and authorizes them to subsidiaries, or the products of subsidiaries can only be marketed, distributed and sold through the parent company. In addition, investors can also control the operation of subsidiaries to a certain extent according to the commitment clauses in the loan agreement.