Source: Ministry of Commerce Website, PRC

Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures

Thursday, November 26, 1998 Posted: 17:21 BJT(0921 GMT)

  • Adopted by the Second Session of the Fifth National People’s Congress on July 1, 1979
  • Revised in the Third Session of the Seventh National People’s Congress on April 4, 1990
  • Revised for the second time in accordance with “Resolution on Revision of the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Venture” of the Fourth Session of the Ninth National People’s Congress on March 15, 2001

Article 1.
The People’s Republic of China, in order to expand international economic cooperation and technological exchange, permits foreign companies, enterprises and other economic organizations or individuals (hereinafter referred to as the “foreign party”) to jointly establish and operate equity joint ventures within the territory of the People’s Republic of China with Chinese companies, enterprises or other economic organizations (hereinafter referred to as the “Chinese party”) based on the principle of equality and mutual benefit, and upon the approval of the Chinese Government.

Article 2.
The Chinese Government shall protect in accordance with the law the investments of the foreign party, the profits due to it and its other lawful rights and interests in an equity joint venture under the agreement, contract and articles of association approved by the Chinese Government. All the activities of an equity joint venture shall comply with the provisions of the laws and regulations of the People’s Republic of China.

The state will not nationalize or expropriate equity joint ventures; under special circumstances, based on the requirements of social and public interests, equity joint ventures may be expropriated in accordance with legal procedures, and corresponding compensation shall be provided.

Article 3.
The agreement, contract and articles of association of an equity joint venture signed by the parties to the venture shall be submitted to the state department in charge of foreign economic relations and trade (hereinafter referred to as “the examination and approval authority”) for examination and approval. The examination and approval authority shall decide within three months to approve or disapprove. After an equity joint venture has been approved, it shall register with the state department in charge of administration of industry and commerce, obtain its business licence, and commence business operations.

Article 4.
The form of an equity joint venture shall be a limited liability company. The proportion of the foreign party’s contribution to the registered capital of an equity joint venture shall in general not be less than 25 percent.

The parties to the venture shall share profits and bear risks and losses in proportion to their respective contributions to the registered capital. The transfer of a party’s contribution to the registered capital must be agreed upon by each party to the venture.

Article 5.
The parties to an equity joint venture may make their investments in cash, in kind, in industrial property rights, etc. The technology and equipment contributed by a foreign party as its investment must be advanced technology and equipment which is truly suited to the needs of China. In case of losses caused by deception through the intentional provision of outdated technology and equipment, compensation shall be paid for such losses. The investment of a Chinese party may include providing the right to use a site during the term of operation of the equity joint venture. If the right to use a site is not a part of the investment by a Chinese party, the venture shall pay the Chinese Government a fee for its use.

The various investments mentioned above shall be specified in the contract and articles of association of the equity joint venture, and the value of each contribution (except for the site) shall be appraised and determined through discussions between the parties to the venture.

Article 6.
An equity joint venture shall establish a board of directors with a size and composition stipulated in the contract and the articles of association after consultation between the parties to the venture; and each party to the venture shall appoint and replace its own director(s). The chairman and the vice-chairman of the board shall be determined through consultation between the parties to the venture or elected by the board. Where a director appointed by the Chinese party or the foreign party serves as chairman, a director appointed by the other party shall serve as vice-chairman. The board of directors shall decide important issues concerning the equity joint venture based on the principle of equality and mutual benefit. The function and powers of the board of directors shall be to discuss and decide, pursuant to the provisions of the articles of association of the equity joint venture, all important issues concerning the venture, namely: the development plan of the enterprise, production and business programs, the budget, distribution of profits, plans concerning labor and wages, the termination of business, and the appointment or hiring of the general manager, the deputy general manager(s), the chief engineer, the chief accountant and the auditor, as well as their functions and powers and their remuneration, etc. The positions of general manager and deputy general manager(s) (or the factory manager and deputy factory manager(s)) shall be assumed by nominees of the respective parties to the venture. The employment?’?dismissal, remuneration, welfare, labor protection and insurance of the employees of an equity joint venture shall be stipulated according to laws in the agreement or contract between employees and the venture.

Article 7.
Employees of an equity joint venture, in accordance with laws to set up labor union to protect employees’ lawful rights by conducting union’s activities. An equity joint venture shall provide the labor union with necessary conditions.

Article 8.
From the gross profit earned by an equity joint venture, after payment of the venture’s income tax in accordance with the provisions of the tax laws of the People’s Republic of China, deductions shall be made for the reserve fund, the bonus and welfare fund for staff and workers, and the enterprise development fund as stipulated in the articles of association of the venture and the net profit shall be distributed to the parties to the venture in proportion to their respective contributions to the registered capital.

An equity joint venture may enjoy preferential treatment in the form of tax reductions and exemptions in accordance with provisions of state laws and administrative regulations relating to taxation. When a foreign party uses its share of the net profit as reinvestment within the territory of China, it may apply for a refund of part of the income tax already paid.

Article 9.
An equity joint venture shall, on the basis of its business license, open a foreign exchange account with a bank or another financial institution which is permitted by the state foreign exchange control authority to engage in foreign exchange business. Matters concerning the foreign exchange of an equity joint venture shall be handled in conformity with the foreign exchange control regulations of the People’s Republic of China.

China. An equity joint venture may, in the course of its business activities, raise funds directly from foreign banks. The various items of insurance of an equity joint venture shall be obtained from insurance companies in the territories of China.

Article 10.
For the raw and processed materials, fuel, auxiliary equipment, etc. needed by an equity joint venture in the approved business scope thereof, shall be purchased in China or on the international market pursuant to the principle of fairness. An equity joint venture shall be encouraged to sell its products outside the territory of China. Export products may be sold on foreign markets by an equity joint venture directly or by entrusted institutions related to it, and they may also be sold through China’s foreign trade institutions. The products of an equity joint venture may also be sold on the Chinese market. When necessary, an equity joint venture may set up branch institutions outside China.

Article 11.
The net profit received by a foreign party after fulfilment of its obligations at law and under the provisions of agreements and contracts, the funds received by it upon the expiration or termination of an equity joint venture as well as other funds may be remitted abroad in accordance with foreign exchange control regulations in the currency stipulated in the joint venture contract. The foreign party shall be encouraged to deposit in the Bank of China the foreign exchange which may be remitted abroad.

Article 12.
The wage income and other legitimate income of foreign staff and workers of an equity joint venture may be remitted abroad in accordance with foreign exchange control regulations after payment of individual income tax under the tax laws of the People’s Republic of China.

Article 13.
The term of operation of equity joint ventures may be agreed upon differently according to different lines of business and different circumstances. The term of operation of equity joint ventures engaged in some lines of business shall be fixed while the term of operation of equity joint ventures engaged in other lines of business may or may not be fixed. Where the parties to an equity joint venture with a fixed term of operation agree to extend the term of operation, they shall submit an application to the examination and approval authority not later than six months prior to the expiration of the operation term. The examination and approval authority shall decide, within one month of receipt of the application, to approve or disapprove.

Article 14.
If serious losses are incurred by an equity joint venture, or one party fails to fulfil its obligations under the contract and the Articles of association, or an event of force majeure occurs, etc., the contract may be terminated after consultation and agreement between the parties to the venture, subject to approval by the examination and approval authority and to registration with the state department in charge of administration of industry and commerce. In case of losses caused by breach of contract, economic responsibility shall be borne by the breaching party.

Article 15.
When a dispute arises between the parties to a venture and the board of directors is unable to resolve it through consultation, the dispute shall be settled through conciliation or arbitration conducted by an arbitral institution of China, or through arbitration by another arbitral institution agreed upon by the parties to the venture. The partied to an joint venture may submit the disputes to the People’s court, if the parties neither stipulated any arbitrations clause in the joint venture contract nor reach such written arbitration clause after the occurrence of disputes.

Article 16.
This law shall come into force on the date of its promulgation.