This is part three of four on a series about the different choices you have to start a business in Shanghai.

Today we will look at the Joint Venture option.

Please check the previous two postings for details on the Representative Office, Hong Kong LLC, and Foreign Investing Partnership Enterprise (FIPE) options.

A Joint Venture is started when two parties want to start a business and enter into a contract in which they share management, operation expenses, investment, profits and losses.

If you are entering into a government-controlled business like restaurants & bars or building & construction this is your only choice as laid out by the government.

A Joint Venture is usually used by a foreign company that has special technology or knowledge and wants to enter the market. The foreign company can tap a big market this way in which to launch its products or services.

There are two kinds of Joint Ventures that a very different from each other.

1. Equity Joint Venture:

Profit and loss is determined by equity share of the partners. Share restructuring needs to be approved by the Chinese government.

The foreign partner has at least a minimum capital requirement of 25% and it can be up to 100% because Chinese partners do not have a minimum capital requirement.

The total investment is considered to be all equity plus all debt. Equity can be in the form of cash, buildings, equipment, materials, intellectual property rights, and land use rights. There are requirements for the percentage of the total investment (equity plus debt) that is equity. These equity percentage requirements are between 33.3% - 70% of the total investment (equity plus debt).

a. Equity = 33.3%: If the equity plus debt total is over $30 million USD.

b. Equity = 40% or 5 million USD (higher value): If the equity plus debt total is between $10 and $30 million USD.

c. Equity = 50% or 2.1 million USD (higher value): If the equity plus debt total is between $3 and $10 million USD.

d. Equity = 70%: If equity plus debt total is less than $3 million USD.

You may be concerned about the initial capital requirements. How will I drum up this much equity? Good news! All capital does not have to be accounted for at the time of startup and initial investment. Only a minimum of 15% is required at registration. The remaining 85% can be paid over a period of 1 to 3 years depending on the size of the investment.

For example, using (d) from above if your total registered capital (equity) is $1.4 million USD, then you need to pay $210,000 USD at registration and then you can pay the $1,190,000 USD balance over the next 2 years. The balance could be cash from profit in your business or from the value of assets you purchase during the first 2 years.

After finalization, this venture will be considered a Chinese legal entity and must follow Chinese laws. This type of venture can purchase land and build on it too.


2. Cooperative Joint Venture:

a. Each entity, foreign and domestic, can operate independently.

b. There are no minimum capital requirements for foreigners or Chinese.

c. In kind services (services that are not paid for with money) like labor, resources, and services can be used as equity. These services are usually donated for trade by other companies you do business with. Being able to use in kind services means you can conserve cash and invest it in other areas of your business.

d. Value of in kind services are to be outlined in the contract as would profit and loss shares.

e. Restructuring can happen at any time without government approval!!

f. Trade unions are used to protect labor interests because labor can be used as equity.

There are 5 types of JV registrations based on industry with different government fees.

1. Consulting Company: Approximately 5,000 RMB
2. Service/IT Company: Approximately 5,000 RMB
3. Trading Company: Approximately 6,500 RMB
4. Food & Beverage Company: Approximately 15,000 RMB
5. Manufacturing Company: Approximately 20,000 RMB


Joint Venture Tax Rates

Profits are taxed as corporate income.

Non- Manufacturing: All profits are subjected to a 30% corporate income tax and a 3% local income tax.

Manufacturing:



There are more taxes for various areas of business! For more details, please check out:

http://www.shzb.gov.cn/en/policyfaq_list_d.php?parentid=157&sortid=163&id=9178

Check back in two weeks for the final installment of our four part series on starting a business in Shanghai. It will be the details on setting up a Wholly Owned Foreign Enterprise (WOFE).


By: Matt Flax - Senior Business Advisor at DragonGate.Asia