Prior to the new PRC Foreign Investment Law ("FIL") taking effect on 1 January 2020, the common entity forms of foreign investment in China were Wholly Foreign-Owned Enterprise (WFOE) and Joint Venture (JV), including the Equity Joint Venture (EJV) and Cooperative Joint Venture (CJV).
The new FIL sets out a framework that will allow equal national treatment of foreign investment and local investment. Starting from 1 January 2020, it replaces the current three laws governing WFOEs, EJVs and CJVs, subject to a 5-year transition.
It also provides that all the foreign invested entities should follow the PRC Company and the PRC Partnership Enterprise law and other applicable laws and measures after the transition period. The Suggested Entity Forms under the PRC Company law and Partnership Law are: Limited Liability Company (LLCs), Companies Limited by Shares (CLSs) and Partnership.
It also provides that all the foreign invested entities should follow the PRC Company and the PRC Partnership Enterprise law and other applicable laws and measures after the transition period. The Suggested Entity Forms under the PRC Company law and Partnership Law are: Limited Liability Company (LLCs), Companies Limited by Shares (CLSs) and Partnership.
WFOE
WFOE is a Chinese registered company that is completely owned by foreign investor and is the most common business structure when registering a company in China as it permits the most freedom in business management.
A WFOE may generally be set up by foreign investors where the type of business which will be carried out by the WFOE is not subject to any shareholding restrictions set out in the Catalogue or other PRC regulations.
A WFOE may generally be set up by foreign investors where the type of business which will be carried out by the WFOE is not subject to any shareholding restrictions set out in the Catalogue or other PRC regulations.
Other types of Foreign Investment:
Joint Ventures (JV)
Equity Joint Ventures (EJV)
– An EJV must take the form of a limited liability company.
– The profits and losses of an EJV must be allocated according to the ratio of capital contributions made by the joint venture partners.
Cooperative Joint Ventures (CJV)
A CJV offers more flexibility to the parties involved because they can decide how the profits and losses will be allocated among themselves and this need not be in proportion to their respective capital contributions.
Limited Liability Company (LLCs)
- A foreign-invested limited liability company is managed by the board of directors or an executive director, which are appointed or elected by company’s shareholder(s). The boards or the executive director also have the right to appoint the general manager, who directs senior management to the day-to-day operation of the company.
- LLC is an independent legal entity.
- The total assets of a limited company are not divided equally, shareholder(s) in this kind of company shall bear limited liability according to the amount of their capital contribution.
- LLCs cannot be listed and they can only seek private funds but not public offerings.
- LLCs are not required to disclose financial, production, operation and management information to the public.
- A LLC can be restructure into a company limited by shares.
- LLCs can only have up to 50 shareholders.
Companies Limited by Shares (CLSs)
- The shareholders meeting has the highest authority of a company limited by shares, this assembly has rights such as making company decisions and appointing and dismiss directors.
- A CLS is an independent legal entity.
- The total assets of companies limited by shares are divided equally to shares, shareholder(s) in this kind of company shall bear limited liability according to the amount of their holding shares.
- The CLSs can be listed and they have the right to issue shares to the public in accordance with relevant regulations.
- The CLSs shall disclose their financial status and production and operation status to the public in accordance with relevant regulations.
- There is no limit to the number of shareholders.
Partnership
- Partnerships are not independent legal entities.
- Partners’ liabilities are depending on the types of partnership, a general partnership or a limited liability partnership.
- Partnerships cannot be listed and they can only seek private funds but not public offerings.
- There is no need for partnerships to disclose financial, production, operation and management information to the public.
- A partnership cannot be restructured to become a company limited by shares.
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