Legal Vehicles for Investment Into China

　　A foreign investor (whether corporateor individual) wishing to make a directinvestment into China has a number ofoptions：

　　Available legal forms

　　1) Representative Office (RO)： A representativeoffice in China of a nonresidententerprise or other organization.2) Wholly Foreign Owned Enterprise(WFOE)： A Chinese limited liabilitycompany established by one or moreforeign investors.

　　3) Equity Joint Venture (EJV)： A limitedliability company established by oneor more foreign investors with one ormore Chinese investors.

　　4) Cooperative Joint Venture (CJV)： Acooperative agreement between oneor more foreign investors and one ormore Chinese investors.

　　5) Foreign Invested Partnership (FIP)： Apartnership enterprise established bytwo or more foreign investors or byforeign investors jointly with Chineseinvestors.

　　6) Joint Stock Limited Company (JSLC)： Ashare-based company， this is the onlyentity that can serve as a vehicle forpublic listing on Chinese stock markets(both A and B shares).

　　7) Branch of a foreign company： Only foreignfinancial institutions are allowedto set up branches in China.

　　Since JSLCs and branches are rarelyused by foreign investors， the focus is onthe first five options.

　　Comparison of legal vehicles

　　In assessing whether to set up an RO， aWFOE， an EJV， a CJV or an FIP， a foreign investorshould consider the following factors：

　　(i) market entry restrictions， (ii) capitalization，(iii) requirements for foreigninvestors， (iv) establishment proceduresand complexities； (v) flexibility regardingprofit distributions and (vi) tax complianceissues. This article will look at the first fivefactors； the tax compliance issues will beaddressed in subsequent articles.

　　Market entry restrictions

　　An RO of a foreign company may onlyengage in indirect business activities inChina - it may not engage in profit-makingactivities (except an RO of a foreign lawfirm). Should the contemplated businessactivities in China be limited to liaison andmarket research activities， the use of anRO could be worth considering.

　　WFOEs， EJVs， CJVs and FIPs can engagein profit-making business activities， butare subject to the Foreign InvestmentCatalogue (FIC)， which generally applies toall Chinese entities with foreign investment.

　　Before a foreign investor decidesto make an investment in China， it shouldfirst analyze the FIC.

　　Capitalization

　　There is no registered capital requirementfor an RO as it is not a legal entity.

　　Similarly， no minimum registered capital isrequired for an FIP.

　　The current minimum registered capitalrequirement for a WFOE， an EJV and aCJV is $4，900.

　　Requirements for foreign investorsThe head office of an RO must have beenin existence for at least two years beforean RO can be established.

　　The number of investors of a WFOE，an EJV or a CJV cannot exceed 50， while aWFOE cannot have any Chinese investors，but an EJV and a CJV must have atleast one foreign investor and at least oneChinese investor. The benefit of a Chineseinvestor is their local knowledge andresources.

　　An FIP may be the subject of an investmentby two or more foreign investors orby foreign investors jointly with Chineseinvestors.

　　Establishment procedures and

　　complexities

　　The establishment of an RO， a WFOE， an EJVor a CJV must be approved by the relevantgovernment agencies before the entity canbe registered with the registration authority.An FIP can be registered directly withoutpre-approval， unless it is in a specializedindustry that requires some or other type ofapproval.

　　Flexibility as to profit distributionsAn RO is not allowed to engage in profitmakingbusiness， but a WFOE is requiredto make an annual allocation of 10 percentof its after-tax profits to a surplus reserveaccount until the account balance is 50percent of the registered capital.

　　Meanwhile， the board of directors ofan EJV or a CJV can determine whether tomake allocations to a reserve account beforethe distribution of profits， while profitdistributions of an FIP can be determinedby the partnership agreement.

　　While there have historically beenmany restrictions on foreign investorsdoing business in China， the general trendis to relax these restrictions， making doingbusiness in the country increasinglyeasier.