In China, direct foreign investment is generally carried out through the establishment of an equity joint venture (“EJV”), a cooperative joint venture (“CJV”)), or a wholly foreign-owned enterprise (“WFOE”). Such vehicles are collectively referred to as “foreign investment enterprises,” or “FIEs.” Foreign companies may also establish representative offices in China for passive and indirect business activities.
FIEs generally choose limited liability companies as their forms. Foreign-funded share-holding companies are also permitted under China law. Compared to American counterparts, FIEs differ in the following areas:
- FIEs generally have a specified term (e.g., 30 years) depending on the nature of the project, which term can be renewed under China law, although the conditions of any such renewal are not clearly specified in the law;
- Various matters, including the initial establishment of an FIE, transfer of a party’s equity interest, increase of an FIE’s registered capital, change of an FIE’s business scope, and dissolution of an FIE, are subject to approval by the Chinese authorities; and
- FIEs must operate within an approved “scope of business,” which tends to be relatively specific.
Previous, WFOEs were restricted to “technologically advanced enterprises” and “export-oriented enterprises.” Nowadays, such limitations do not exist anymore, and an increasing number of FIEs choose WFOE as their business form. However, where cooperation with a Chinese company is required for statutory or strategic reasons, many foreign companies, particularly in the manufacturing sector, are opting for contract-based relationships, such as tolling and/or processing arrangements, rather than forming full-scale Sino-foreign joint ventures.
In choosing between joint ventures and WFOEs, the investment decision will typically depend on a number of variables, including:
- Restrictions under China law with respect to foreign investment in a particular industry;
- The priority the investor places on controlling technology, intellectual property, and the management of the FIE;
- The need for access to established sales and distribution channels;
- The need for a trained work force; and
- Availability of existing facilities or sites owned by a Chinese party.
In China, all FIE projects are subject to restrictions imposed by the Investment Regulations and the Investment Catalogue. Specifically, the Investment Regulations divide foreign investment projects into one of four categories: (1) Permitted, (2) Encouraged, (3) Restricted, or (4) Prohibited. Foreign investment projects under the latter three categories are expressly listed in the Investment Catalogue according to industry sectors. If an industry sector is not specifically listed, it is deemed to fall within the “Permitted” category. In certain strategic industries, the Investment Catalogue or other policy guidelines may limit foreign participation in FIEs to 50 percent or less of the registered capital. They may also specifically forbid WFOEs or may require investment in the form of either an EJV or a CJV.
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