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Setting up a Company

China.org.cn, April 21, 2015
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Foreign investors can set up their representative offices (RO), part of their parent companies, in Hunan. The ROs, though not a separate legal entity, come of use in the creating and maintaining of business liaisons, as well as undertaking market research, technological exchanges and other non-transactional operations.

Foreign investors may opt for any of the following business models when establishing their Hunan business entities: Sino-foreign equity joint venture, Sino-foreign cooperative joint venture, wholly foreign-owned enterprise, cooperative development business, foreign investment company limited by shares, foreign-invested holding company, or group operation of foreign-invested enterprise.

With the aim of attracting further foreign investment, Hunan has been striving to improve its investment environment and expand the possibilities for foreign investors to maneuver in the province.

1. Major Types of Foreign Direct Investment (FDI)

The three major types of FDI available in China are as follows:

1) Sino-foreign Equity Joint Ventures (EJVs)

A Sino-foreign Equity Joint Venture (EJV) is probably the most widely used type of Foreign Direct Investment (FDI). It's a limited liability company jointly set up in China by both Chinese and foreign investors, with the latter usually putting in over 25 percent of the overall investment. All parties in a joint venture shall share the profits, risks and losses in proportion to their respective contributions to the registered capital of the joint venture. EJVs may be engaged in a broader range of activities and sectors than Wholly Foreign-owned Enterprises (WFOEs).

2) Sino-foreign Cooperative Joint Ventures (CJVs)

A Sino-Foreign Cooperative Joint Venture (CJV) is a contract venture jointly set up in China both by Chinese and foreign partners. The contract specifies all issues regarding the terms of cooperation, the division of earnings, the sharing of risks and losses, capital recovery, management and business operations of the venture, and ownership of the remaining property upon termination of the contract. In a CJV, the foreign company typically provides the advanced technology and most of, or all of, the required funds, whereas the Chinese party offers the land use rights, factory buildings, necessary facilities, and occasionally a certain amount of capital.

The main difference between a CJV and an EJV is constituted by the fact that in a CJV, the capital contributions and terms of cooperation are not converted into shares. Even if they are converted, the CJV's profits, risks, debts and remaining property upon termination of the contract may not necessarily be shared by the parties in proportion to their respective initial contributions to the capital. In addition, a CJV is more flexible in terms of investment recovery and business management.

3) Wholly Foreign-owned Enterprises (WFOEs)

A Wholly Foreign-owned Enterprise (WFOE) is a limited liability company set up in China through foreign investment only. The foreign investor has full managerial and operational control over the newly-established business. The longevity of a WFOE usually lies between 15 and 30 years, and it is only permitted to conduct activities within its own business scope. WFOEs can be engaged in a wide range of sectors, but certain restrictions do still apply; these limitations are specified in the Catalogue of Industries for Guiding Foreign Investment and industry-specific regulations.

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