Hong Kong: Comparative Analysis between the different forms of Investment Vehicles

Last Updated: 26 September 1995
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.

1. Between an equity joint venture and a cooperative joint venture:

An equity joint venture is registered in the PRC as a separate legal entity, whereas a cooperative joint venture may not necessarily be so, depending on whether it is a "true" cooperative venture or a "hybrid" cooperative venture. In an equity joint venture, the investors' capital contributions, in cash or in kind, must be capable of being expressed in monetary terms, and the risks, profits and number of appointments to the board of directors are all in proportion to the parties' capital contribution ratios. In a cooperative joint venture, whether "true" or "hybrid", the contributions of the investors need not be broken down and the risks and profits need not be shared strictly in accordance with the capital contribution ratios. Further an equity joint venture enjoys limited liability, whereas the position is not entirely clear with respect to a cooperative joint venture.

There is no ceiling stipulated in the relevant legislation as to the ratio of the foreign ownership in either forms of joint venture, but equity joint ventures require a minimum capital input from the foreign party of at least 25% of the venture's registered capital. In both cases capital contributions may be in cash or in kind (including intangible rights such as intellectual property) but intellectual property rights must not constitute more than 20% of the joint venture's registered capital regardless of what kind of joint venture it is. There are detailed rules on the valuation of contributions in-kind, and the parties are required to employ a state-approved valuation agency to value the land or contributions in-kind.

Foreign investors often prefer to invest in a cooperative joint venture largely because this form of venture is less regulated by legislation than the equity joint venture. For instance, the form of investment and risk/profit sharing is more flexible with a cooperative joint venture, and will be determined largely by the parties in the joint venture contract. With an equity joint venture, as mentioned above, the form of capital contribution and profit sharing is strictly defined by law in terms of the parties' relative capital contributions. A cooperative joint venture also affords greater flexibility to the management of the enterprise, as this is also less regulated by legislation.

The term of the joint venture will usually be fixed by the parties, generally between 10 to 30 years, although a fixed duration is not necessary - only in certain industries must joint ventures have a definite term.

The tax position of the two forms of joint venture is the same.

2. Between a joint venture and a WFOE:

To establish a WFOE in the PRC, the foreign investor must comply with at least one of the following conditions:-

(1) adopt advanced technology and equipment, engage in the development of new products, economise on the use of energy and raw materials, achieve product upgrading and replacement or produce import substitutes; or

(2) have annual exports amounting to at least 50% of the value of its total production output for the year.

In addition, the legislation prohibits a WFOE from operating in certain industries, including "domestic commerce". The term domestic commerce is not defined, although this is usually understood to involve importing into the domestic market or carrying out retailing or wholesaling activities.

The tax position of a WFOE is similar to that of a joint venture.

3. Between a joint venture and a representative office:

There are numerous restrictions against the conduct of business activities through a representative office (see article "Representative Offices"). These restrictions although not always enforced ensure that the role which representative offices are supposed to play is mainly limited to liaison between Chinese customers and the foreign company's head-office or between Chinese customers and the foreign company's network of joint ventures.

4. A Summary of The Various Types of Foreign Investment Enterprise

Three Types of Foreign Investment Enterprises

			Equity		Cooperative			Wholly Foreign
			Joint			Joint			Owned 	
			Venture		Venture		Enterprise

Contract 		Yes 			Yes 			No

Articles of 		Yes 			Yes 			Yes
association

Standards for 	Advanced		Export orientated	Must benefit
investment		technology,		and advanced		development
			scientific		technology		of Chinese
			management,		encouraged		economy,
			technical					utilise
			renovation of				advanced
			enterprises,					technology
			improved					and equipment
			economic					or export all,
			results,					or most of
			expanded					their products
			exports,					Certain
			training of					industries
			technical and				excluded
			managerial					
			personnel					

MOFTEC Approval 	Yes 			Yes 			Yes

Project proposal	Yes 			Depends 		Yes

Feasibility study	Yes 			Depends 		Yes

SAIC registration	Yes 			Dependant on 	Yes
						creation of
						legal personality

Capital 		Cash, 			Cash, 	kind,		Cash,
contribution		capital goods, 	industrial 		machinery,
			industrial		property rights,	equipment,
			property rights,	land use		industrial
			know-how,		rights,		property
			land use rights	property		rights,
			land use rights	non-patented		proprietary
						technology		technology

Board of 		Required. 		Requirement 		Yes
directors		Membership not	depends on		
			necessarily in	structure of		
			proportion to	venture
			investment		


Separate 		Yes 			Requirement		Yes
management 					depends on
structure 					structure of 
						venture

Domestic sales 	Possible.		Possible.		Possible.
			Export ratio		Export ratio		Exports
			normal			normal			must be
									at least
									50% of
									annual output

Accounting 		Accounting 		Books of account	Accounting as
			as separate 		must be 		separate
 			entity required 	established 		entity required

Profit 		In proportion 	May be determined	To foreign
distribution		to investment.	by contract.		investor.
			May be repat-	Foreigners may	May be repat-
			riated after tax	use profits		riated	 after
						distributed to	tax
						reduce investment.	
						May be repat-
						riated	 after tax

Tax 			Income Tax 		Income Tax 		Income Tax

Investment term 	Maximum normally 	As stipulated	To be set
			30 years, but	by contract 		in application
			may be up to 
			50 years or unlimited
			in certain cases

Early termination 	Permitted 		Permitted 		Permitted

Governing law	PRC law 		PRC law 		PRC law
for JV Contract

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.

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