This article is intended to provide a general guide to the subject matter. Specific advice should be sought about individual circumstances. Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.

Set out below are brief notes on the three types of foreign investment enterprise ("F.I.E.s") which are permitted in China.

1. Equity Joint Ventures

Equity joint ventures are normally the preferred medium of investment by Chinese joint venture partners and by Chinese Government officials alike because each party's liability is limited to the extent of its capital contribution and the profits and losses of the joint venture are shared pro rata between the parties in accordance with their contributions to the registered capital. Furthermore appointments to the board of directors of the Joint Venture Company are also made in the registered capital contribution ratios.

Legal Framework

The Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Investment and the Implementing Regulations for the Joint Venture Law are the primary pieces of legislation for equity joint venture in the PRC. These and other related legislation address major issues such as documentation, capitalization, external financing, approval procedures and registration.

Taxation

Equity joint ventures are potentially subject to the following taxes: the enterprise income tax under the Unified Tax Law, local income tax, value added tax, customs duties, the urban real estate tax and the vehicle and vessel license tax.

Tax holidays, exemptions and reductions from taxes are applicable to equity joint ventures.

2. Cooperative Joint Ventures

Cooperative joint ventures are generally preferred by the foreign party because the relationship between the joint venture partners as well as the distribution of profit and management control are all governed by contract rather than capital contribution ratios. This means that the foreign partner can "control" to a greater extent his Chinese partner's actions and motivation. Indeed there is one form of cooperative joint venture which does not even involve the establishment of a PRC legal entity separate from the investing parties. This type of cooperative joint venture is called a "true" cooperative joint venture (which is similar to a western partnership) and it should be distinguished from a "hybrid" cooperative joint venture which will be registered as a separate legal entity.

Legal Framework

The Law of the People's Republic of China on Chinese-Foreign Cooperative Joint Ventures sets forth the basic guidelines for the establishment and operation of cooperative joint ventures.

Taxation

In a "true" cooperative joint venture in which no separate legal person is formed, each party is required to pay its own taxes on its share of the profits of the joint venture. For the foreign party this means that its net income is taxed under the Unified Tax Law.

In a "hybrid" cooperative joint venture in which a separate legal person is established, the cooperative joint venture itself will be liable for enterprise income tax under the Unified Tax Law.

In addition, both forms of cooperative joint ventures may potentially be subject to value added tax, customs duties, urban real estate tax, and vehicle and vessel license tax.

Tax holidays, exemptions and reductions from taxes are available to cooperative joint ventures.

3. Wholly foreign-owned enterprises

Finally, there is the wholly foreign owned enterprise ("WFOE"). This is a PRC legal entity which is wholly owned and wholly managed by the foreign party.

WFOEs have restrictions attached to their operation and production, namely, they must use advanced technology and produce upgraded products of existing domestic counterparts. Alternatively, a WFOE must export 50% of its total production.

Legal Framework

The establishment and operation of WFOE are governed by the Law of the People's Republic of China on Wholly Foreign-owned Enterprises, the Detailed Implementing Regulations for the Foreign Enterprise Law and a document promulgated by MOFTEC, "Interpretation of Several Provisions of the Detailed Implementing Rules of the Law of the People's Republic of China on Wholly Foreign-owned Enterprises.

Taxation

WFOEs may potentially be subject to the following taxes: the enterprise income tax under the Unified Tax Law, value added tax, customs duties, the urban real estate tax and the vehicle and vessel license tax.

Tax holidays, exemptions and reductions from taxes are equally applicable to WFOEs.

Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.