Structuring your JV - General issues
There are several major, inter-related issues to address if you intend to set up a JV in China.
Some of the issues you need to consider apply to all types of foreign entities in China, while others relate specifically to JVs.
- business scope – what should yours be?
- registered capital requirements – these may vary depending on the industry and the location. It is also absolutely critical that you do not simply put in the minimum because the regulations say you can – you may find the business is under-capitalised if you do so. This is an operational judgment for you, not the bureaucrats.
- Are you manufacturing 100% for export, or part for export, part for domestic sales? Where are your clients located? Do they require an official local invoice? Would they require you to sell your goods to Hong Kong or other off-shore jurisdictions? – they all have a fundamental impact on how you structure the business!
- Agreement, Contract and Articles of Association – these need detailed work by you to ensure you cover all the bases. You are setting up a company with a 10-15 year life span and you need to be sure you know what you are getting into.
Business scope
Having set up a limited company does not necessarily mean you can engage in any kind of business activity, as is the case in some Western countries. Like other entities in China, JVs can only be operated within the business scope approved by the authorities. Other activities are subject to further approval. So it is vital to determine what you want do right from the start.
Lazy, or deliberately disingenuous, business scopes, such as only using the phrase “production of (product)”, will not necessarily qualify a JV as a production company. You will also fail to qualify for tax holidays, even if the local government approves it, as the tax bureau may require a more detailed and specific explanation. We have encountered numerous problems of this nature, all requiring a scope of business change on the licence before the tax bureau is satisfied with exemption status. You need to ensure your business scope is accurate. Attempts to fool the tax bureau into thinking you are one thing, while in fact you are another - even if you can get it past the approvals process - inevitably end in failure. Play the game and say what it is you are really doing.
To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
