China: Investment vehicles


Types of investment vehicles

Legal forms of typical investment vehicles
There are three major types of vehicles for inbound investments into China that are commonly used by foreign investors:

  • Equity Joint Venture (EJV) – a limited liability company incorporated by one or more foreign investors together with one or more Chinese investor(s). Profits and losses are distributed in proportion to each investor’s capital contribution.
  • Cooperative Joint Venture (CJV) – a vehicle similar to an EJV but can be incorporated either as a limited liability company or a non-legal entity on a contractual basis. It provides more flexibility in terms of cooperation conditions, distribution of profits and liability, and return of investment.
  • Wholly Foreign-Owned Enterprise (WFOE) – a limited liability company wholly owned by foreign investor(s).

Opening a representative office is also the most cost-effective method that provides basic entry. However, restrictions on direct business activities make representative offices unattractive as an investment vehicle for investment in the PRC real estates.

There are some alternative channels available to foreign companies and funds for structuring their investment in the PRC. These include:

  • Foreign-invested holding company, which are usually set up by foreign investors to carry out investment activities in the PRC, and the requirements for establishing such holding company is relatively high;
  • Foreign-invested partnership;
  • Qualified Foreign Limited Partner (“QFLP”), which is only available in a few number of trial areas such as Shanghai, Beijing, Tianjin, Chongqing, Shenzhen, Qingdao, Guizhou and Pingtan. QFLP enables qualified foreign investors (acting as the limited partners) to set up a private equity fund (in the form of a limited partnership or a limited liability company) with qualified domestic investors (acting as the general partner). Establishment of QFLP is subject to the local requirements, which are relatively high, and additional pre-approval process.

Common structures used by foreign investors
EJVs and CJVs (together, “JVs”) were the first investment structures introduced and they (especially the EJV) were the most popular vehicles for many years as under the PRC foreign investment regulatory framework, a JV (as opposed to a WFOE) is required in certain industries. In addition to the regulatory requirements, there are also commercial considerations which encourage foreign investors to take on a local Chinese partner, for example access to the local Chinese partner’s network, local market knowledge, workforce and facilities. In practice, the CJV structure is normally used for Build-Operate-Transfer projects, infrastructure projects, and joint construction and management of hotels.

WFOE is an investment vehicle of choice for most foreign investors in industries where there are neither restrictions on foreign investment nor strategic reasons for engaging a Chinese partner. With the Chinese government easing foreign investment restrictions, WFOE has become the most frequently used foreign investment vehicle nowadays. WFOEs give foreign investors full autonomy over the entities and allow control of its governance through its articles of association without the involvement of local Chinese partners. However, WFOEs are not allowed to enter into certain industries.

Setting up an investment vehicle

Minimum capital requirements
There is no minimum registered capital requirement for most of the companies registered in the PRC (including JVs and WFOEs) except for those in special industries such as the financial or telecommunication industry. Notwithstanding the above, the registered capital of a company should be sufficient to satisfy its contemplated operation and business scale.

There is another concept for foreign-invested enterprises (“FIEs”, including the JVs and WFOEs) called “total investment”, which is the projected amount of funds necessary for a FIE to attain the production or operational capacity. Under the PRC law, the level of foreign exchange loans/debts that a FIE is allowed to borrow is subject to the difference between its total investment and registered capital. Such difference, which is referred to as the “statutory minimum debt-equity ratios”, is the maximum amount of foreign exchange loan the FIE can legally borrow. The statutory minimum debt-equity ratios is set out in the table.


Procedures for setting up an investment vehicle
The general procedures for the establishment of JVs and WFOEs, which are not subject to special operating permit/license, are as stated below:

  • Name pre-reservation with the competent local company registration authority (“AIC”);
  • Record filing (for investment not falling into the Negative List for Foreign Investment) or approval (for investment falling into the Negative List for Foreign Investment) of establishment of the foreign investment enterprise with the competent local counterpart of the Ministry of Commerce (“MOFCOM”). Currently, foreign investment in the real estate section falls within the “permitted” industries, and consequently record filing will apply;
  • Registration with AIC for the establishment of the JV/WFOE and issuance of the five-in-one business license. The issuance of the business license signifies the official incorporation of the JV/WFOE;
  • Post-registration formalities, including:
    - Arranging for chop carving by a qualified chop carving agent;
    - Opening various bank accounts, including the foreign exchange capital account to receive capital injection, RMB basic account, special tax payment account (as required by the local tax authority in charge of the JV/WFOE) and other accounts necessary for business operation of the JV/WFOE;
    - Verification of the types of taxes applicable to the JV/WFOE with the local tax authority in charge of the JV/WFOE; and – If the JV/WFOE intends to conduct import and/or export business, it is a requirement to additionally apply for the foreign trade operator record filing, customs registration, and inspection and quarantine license registration; and
  • Applying for the status of ordinary VAT taxpayer if applicable.

If the application documents are complete and in good order, steps (a) to © would normally take around 1 to 1.5 months, and the post registration formalities will roughly take around 1.5 to 2 months.

Depending on the location and particulars (such as the proposed business activities, amount of the proposed total investment and registered capital) of the JV/WFOE and on the local authorities involved, the procedures may vary in one detail or the other.

Governance, compliance and Taxation
The governing structures of EJV and CJV are generally similar, but have minor differences in certain aspects. A board of directors, which consists of no less than 3 directors, is the highest authority of an EJV. A CJV can have either a board of directors or in the case where the CJV is not a legal person, a joint management committee, to decide the major issues of the CJV. The chairman of the board of directors, or the chief of the joint management committee (if applicable), is the legal representative of the JV and can either be a PRC or foreign national. The mandate for the directors of an EJV shall be four years while those of a CJV shall be no more than three years. The directors of the JVs can serve consecutive terms if reappointed.

On the other hand, the highest authority of a WFOE is the sole shareholder or shareholders’ committee as applicable. WFOEs can have either a board of directors or an executive director. The board of directors shall consist of at least three directors and one of them has to be the chairman. Small and medium sized companies, or companies with only a few shareholders, often opt for an executive director. The mandate for the directors or the executive director shall not exceed three years. However, they can be re-appointed.

In addition to the board of directors or executive director, or joint management committee as applicable, the JV/WFOE shall also have a board of supervisors. In the case where the JV/WFOE is small scale or has a small number of shareholders, at least one supervisor is to oversee the execution of the duties by the directors and senior management personnel of the JV/WFOE. To ensure that there is no conflict of interest, the JV/WFOE’s directors and/or senior management personnel cannot concurrently serve as the supervisor of that JV/WFOE.

The management personnel of a JV/WFOE also consists of a general manager in addition to other board-appointed officers, such as the chief financial officer or deputy general manager.

Compliance costs
There are no set compliance costs as they depend on the actual situation of the companies. Generally, FIEs in China are subject to the following on-going compliance requirements:

  • Annual audit on the financial accounts by a qualified CPA firm in the PRC;
  • Joint annual inspection between April 1 to June 30 every year;
  • Annual enterprise income tax reconciliation by May 31 every year;
  • Annual report of equity-related data related to inbound and outbound direct investment by 30 September every year;
  • Filing of periodic tax returns; and
  • Periodic extension of the working permits and residence permits for the expatriate personnel if applicable.

Tax
The major taxes relevant to the daily operation of a JV/WFOE in the real estate sector are set out below:

  • Enterprise Income Tax (企业所得税, EIT): 25% on profits and reduced rate is available for small and low-profit enterprise, qualified high-tech enterprise and some special areas;
  • Value Added Tax (VAT): For small-scale VAT taxpayers, 5% on sales and leasing of real property; for general VAT taxpayers, 6% (most of the services), 11% (sales and leasing of real property) and 17% (most of the goods) on VAT payable which equal to the output VAT in the current period minus input VAT in the current period;
  • Surcharges (including urban construction and maintenance tax, education surcharges, and local education surcharges where applicable): around 12% of the paid VAT;
  • Deed tax: Levied when acquiring the land or property. Typically 3-5% but reduced rate may be available depending on the size, holding period, location and other conditions of the land/property;
  • Stamp duty: Levied on contracts with respect to purchase and sales, processing, construction and engineering projects, lease, loan, technology contracts, property transfer, accounting ledgers, etc. The tax rate is in the range of 0.005% to 0.1%;
  • Land Value Appreciation Tax (“Land VAT”): Progressive rates ranging from 30% to 60% on the appreciation amount;
  • Property tax: Owners and users of building for commercial use are subject to property tax. For properties held by lease, a rate of 12% of the annual rental income is imposed. For self-used properties (excluding residential property), a rate of 1.2% of the property’s adjusted cost (with a 10 to 30% deduction from the original cost) is imposed. Exemption might be available in certain circumstances;
  • Urban and township land use tax: Individuals and entities that use land in cities and towns are subject to the urban and township land use tax, which is in the range of RMB0.6 to 30 per square meter depending on the location. Exemption might be available in certain circumstances;
  • Import customs duty: The rate of which vary from the HS code of the imported products.

Updated on 1 March 2019.

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