• Larry Zhou

Invest in China (2): Choose Your Business Vehicle

Overview

For foreign investment in China, 2019 is an important turning point. The legislature published the "Foreign Investment Law" in March 2019. This new law will take effect on January 1, 2020.

Before it comes into force, there are mainly three forms of establishing enterprises for foreign investors investing in China: Sino-foreign equity joint venture enterprises (JV), wholly foreign-owned enterprises(WFOE) and Sino-foreign cooperative enterprises, which are regulated by three different and corresponding laws and regulations.

After the new law comes into force, there will be five years for the already established foreign-funded enterprises to make a transition. For example, the approval and filing of investment projects, industry licenses, and enterprise registrations shall be governed by the Company Lawand the Law of the Partnership Enterprise.

The Foreign-Invested Enterprise Model Before the New Law Comes Into Effect

Sino-foreign equity joint venture enterprises (JV)

Definition: Foreign companies, enterprises and other economic organizations or individuals, in accordance with the principle of equality and mutual benefit, with the approval of the Chinese government, jointly hold joint ventures with Chinese companies, enterprises or other economic organizations within the territory of the People's Republic of China.

Organization Form: It can only be a legal person organization form of a limited liability company, which belongs to a Chinese legal person.

Business Management: Only the board of directors system can be adopted,which is the highest authority, and the general manager is responsible for the operation and management of the company.

Who to Submit the Documents: The Chinese and foreign parties jointly submit the documents.

Proportion of Profit Sharing and Risk Sharing: According to the proportion of registered capital contribution.

Sino-foreign cooperative enterprises

Definition: In order to expand foreign economic cooperation and technical exchanges, foreign enterprises and other economic organizations or individuals jointly hold Sino-foreign cooperative enterprises with Chinese enterprises or other economic organizations in China in accordance with the principle of equality and mutual benefit.

Organization Form: It can be either a Chinese legal person organization with limited liability company or an economic organization without legal person status.

Business Management: Generally divided into three modes:

To form a legal person, adopt a board system, and set up a general manager;

A joint management system without forming a legal person. Generally, a joint management committee with a director and deputy director;

Entrusted management system: one party entrusts the other party to manage or the parties jointly entrust a third party to manage.

Who to Submit the Documents: Submitted by Chinese partners.

Proportion of Profit Sharing and Risk Sharing: Usually agreed by contract.

Wholly foreign-owned enterprises (WFOE)

Definition: An enterprise wholly invested by a foreign investor, which established in China and in accordance with the relevant laws of China, excluding affiliates and branches of foreign enterprises and other economic organizations in China.

Organization Form: It can only be a legal person organization form of a limited liability company, which belongs to a Chinese legal person.

Business Management: The shareholders or shareholder meeting is the highest authority, and the board of directors or the executive director is elected by the shareholders.

Who to Submit the Documents: Submitted by foreign partners.

Proportion of Profit Sharing and Risk Sharing: In the case of multiple foreign investors, according to the proportion of paid-in capital contributions.

The Foreign-Invested Enterprise Model After the New Law Comes Into Effect

Company

Classification: According to the scope of shareholder responsibility, the company can be divided into the Limited Liability Company (LLC) and the Company Limited by Shares (CLS).

Established:

1 Established according to related laws;

2 The company must have its own name, organization and place;

3 The company has the control of property to engage in business activities;

4 The company's property is completely separated from the shareholder's property;

5 The ownership and the right to use of the capital contribution convert into equity.

Responsibility:

1 The company can engage in civil and commercial activities and independently bear liability;

2 Shareholders are only responsible for the company's debts to the extent of the capital contribution.

Partnership

Classification: According to the scope of partners' liability, it can be divided into the General Partnerships and the Limited Liability Partnerships (LLP).

Established:

1 Established according to related laws;

2 With a qualified partner, capital contribution, name, agreement, and location.

Responsibility: Unlike a company, the debt of partnership is shared by the partners.

1 The partners of a general partnership have unlimited joint liability for corporate debt.

2 A limited partnership consists of at least a general partner and a limited partner. The general partner assumes unlimited joint liability for the partnership debt. The limited partner bears limited liability for the partnership debt to the extent of its subscribed capital contribution

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