Contractual Joint Venture CJV

1

Cooperative Joint Ventures in PRC

Professor Shen Wei

Summer 2015

PRC COOPERATIVE JOINT VENTURE (CJVs)

1. Background

A CJV may be established as:

A contractual arrangement between the joint venture partners

(comparable to a consortium)

An independent legal entity with the joint venture partners as

the shareholders

Except for certain unique features, CJVs having enterprise legal

person status (hybrid CJVs):

Are a variation of equity joint ventures (EJVs) having most of the features of EJVs

Operate in much the same way as EJVs

2


CJVs offer flexibilities for the joint venture partners to agree on their

respective contributions to CJVs, shares of profit and distribution of

assets upon liquidation

In many aspects, contractual CJVs, as a form of foreign investment

enterprises, must also be operated according to rules and regulations

governing the operation of EJVs (e.g. foreign exchange)

CJVs are generally more suitable for infrastructure projects and

offshore oil exploration projects, etc.

Guangdong home of CJVs?


Legal Framework

The Law of the PRC on Sino-foreign Cooperative Joint Ventures, entered

into effect on April 13, 1988 and further amended on October 31, 2000

(the CJV Law)

The Detailed Implementing Rules of the CJV Law, promulgated on

September 4, 1995 and further amended on October 31, 2000 (the CJV Rules)

The Interpretation of the Implementation of Certain Articles Concerning

the Implementation of the CJV Rules, promulgated on October 22, 1996

The PRC Company Law (for hybrid CJVs)

3


Forms of CJVs

Contractual CJVs (or True CJV)

A contractual arrangement between the joint venture partners

No creation of a separate enterprise legal person distinct from its

joint venture partners

Each joint venture partner is responsible for:

Making its own contribution to the CJV

Paying its own taxes on profit derived from the CJV

Bearing its own liability for risks and losses


CJVs with PRC Enterprise Legal Person Status (Hybrid CJVs)

A separate PRC enterprise legal person distinct from the joint

venture partners (similar to EJVs)

A limited liability company whereby the join venture partners liability to the CJV is generally limited to their respective

contributions to the CJVs registered capital

4


Documentation and Approval Procedures

The documentation required for the establishment of a CJV and the

procedure for securing approval of the project are essentially the

same to those applicable to EJVs


Parties Investment

The joint venture partners may contribute (for hybrid CJV) or provide

(for contractual CJV) to the CJVs in the form of cash, tangible

property or patented and unpatented technology and land use rights,

etc.

The contributions made by the joint venture partners to the

registered capital of a hybrid CJV are

owned by the CJV; and

subject to the same regulations governing contributions to

registered capital, such as minimum equity and timing of

contributions, applicable to EJVs

5


Parties Investment

- The investment or cooperative conditions provided by the joint venture partners to a

contractual CJV are respectively owned by the contributing parties but may be

jointly owned pursuant to mutual agreement


Accounting and Distribution of Profits

The accounting matters of a hybrid CJV are generally handled with

reference to the rules applicable to EJVs

The joint venture partners may agree to a ratio of profit distribution

not in proportion to the ratio of the parties contribution to the registered capital (hybrid CJVs) or provision of investment or

cooperative conditions (contractual CJVs) to the CJV

6


Management and Operation

A contractual CJV must establish a joint management office,

comprising representatives from the joint venture partners, for the

management of the CJV. The joint management office of a CJV

determines all major matters of the CJV

A hybrid CJV must establish a board of directors which is the

highest management authority of the CJV, in a way identical to EJVs


Recoupment of Registered Capital by Foreign Parties

If the joint venture contract of a CJV stipulates that the ownership of

the CJVs fixed assets remaining after liquidation is to be reverted to the Chinese partner, the foreign partner may repatriate its

investment in the CJV prior to the expiration of the joint venture term

through:

A distribution of profit to the foreign partner in excess of its

investment proportion

Recoupment of its investment prior to the CJVs payment of income tax, subject to the approval by the finance authority

7


Subject to the approval by the finance authority and the

provincial level examination and approval authority on foreign

investment:

The foreign partner may recoup its investment out of the

depreciation of the fixed assets of the CJV

The foreign partner must provide a bank guarantee issued

by a bank in China to guarantee the CJVs ability to repay its debts

If an accelerated depreciation method is to be used, prior

approval by the State tax authority must be obtained

Generally, if the foreign partner of a CJV recovers its investment

during the joint venture term, the Chinese and foreign joint

venture partners shall be liable for the debts of the CJV.


EJVs and CJVs: A Comparison

Contractual CJVs also differ from EJVs in the following:

Labor

Their employees are provided by and are the employees of

the Chinese joint venture partners

Taxes

Each joint venture partner is required to pay its own taxes

on its share of the profits of the CJV

Apart from the above discussion, EJVs and CJVs are generally

subject to same rules in other aspects of their operation

Documents

Contractual Joint Venture CJV