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Explanations on Implementing Certain Articles of Detailed
Rules on the Implementation of the Law of the People's Republic of China on Sino-Foreign
Joint Cooperative Ventures
(Promulgated by the Ministry of
Foreign Trade and Economic Cooperation on October 22, 1996)
Detailed Rules on the Implementation of the Law of the People's
Republic of China on Sino-Foreign Joint Cooperative Ventures (hereinafter referred to as
the Detailed Rules) was promulgated and enforced on September 4, 1995. Now, explanations
concerning the implementation of the Detailed Rules are hereby made as follows:
1. Article 14 of the Detailed Rules stipulates:
"Joint ventures with Chinese legal person status shall be limited
liability companies. The partners shall share responsibilities within the limit of its
investment or cooperative means rendered, unless otherwise stipulated under the contracts.
The joint venture shall have liability for its debts with all of its
capital."
The explanations: In accordance with the Section 1 of the present
article and Article 18 of the Law of Corporation of the People's Republic of China, the
organizational form of any joint cooperative ventures with Chinese legal person status
which have been set up after the approval shall be limited liability companies.
2. Article 18 of the Detailed Rules stipulates:
"The partners' investment or cooperative means could be
currencies, or material objects or industrial rights, special technologies, land use
rights and other property rights.
The Chinese partners' investments or cooperative means, if they are
State fixed assets, shall undergo assets assessment in accordance with related laws and
administrative regulations or provisions.
For joint ventures with Chinese legal person status, the foreign
partners' investment shall normally be no less than 25% of the total registered capital of
the joint venture. For joint ventures without Chinese legal person status, the specific
requirements for the partners' investments or rendition of cooperative means shall be
stipulated by MOFTEC."
The explanations: The investment, as mentioned in Section 1 of this
article, refers to currencies, buildings, machinery and equipment or other materials,
industrial property rights, special technologies, land use right and others which are
assigned a fixed price and used as the investment of partners.
The cooperative means, as mentioned in Section 1 of this article,
refers to the real estate and other property rights, including: land use right, ownership
or right of use concerning the buildings constructed on the land and other fixed accessory
equipment attached to the buildings, industrial property rights, special technologies and
other property rights. The cooperative means rendered by partners to the joint cooperative
ventures belong to the property of joint cooperative ventures. The said means shall not be
expressed in the form of currencies, but shall be registered as subsidiary and have
liability for the debts of the joint cooperative ventures.
The Chinese partners' investment and cooperative means shall undergo
assessment, if they are required to do so in accordance with the stipulations of relevant
laws and administrative regulations. The assessment results shall be the basis for the
negotiations for cooperation, so as to prevent the loss of the state property.
For joint cooperative ventures without Chinese legal person statures,
the foreign partners' investment shall be no less than 25% of the total investment made by
the Chinese and foreign partners.
3. Article 44 of the Detailed Rules stipulates:
"When the operation term as set in the joint venture's contract
expires, if the joint venture's fixed assets have been set to be handed to the Chinese
partners free of charge, the foreign partners can, during the operative term, apply to
recover their investment in the following manners:
(1) Aside from the distribution in accordance with the investment
and/or cooperative means rendered, the foreign partner can increase its share in the
distribution in the contract;
(2) With the examination and approval of the finance and taxation
authorities in accordance with related taxation regulations, the foreign partners recover
their investment before the joint venture pays its income tax;
(3) Other investment recovery measures approved by the examination and
approval departments and finance and taxation departments.
When the foreign partners recover investment during the operation term
as described in the previous paragraphs, the Chinese and foreign partners shall shoulder
the joint ventures' debts in accordance with provisions of related laws as well as the
ventures' contracts."
The explanations: The fixed assets of joint cooperative ventures, as
mentioned in Section 1 of this article, refer to the fixed assets out of the remaining
assets after the joint cooperative venture liquidates its assets, financial claims and
debts and pays its debts in accordance with the stipulations under Article 24 of the Law
of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures. Before
the joint cooperative venture pays off after liquidation and discharges its debts, the
Chinese partner shall not distribute in advance the fixed assets of the joint cooperative
venture even when the operation term of the venture expires.
Item 3 of Section 1 in this article means that, with the approval by
the finance and taxation departments and the examination and approval departments, foreign
partners are allowed to recover their investment in advance during the operation term
through means of distributing depreciation costs of the fixed assets of the joint
cooperative venture. In case the assets of joint cooperative venture decrease as a result
of foreign partner's distribution of depreciation costs of the venture's fixed assets, the
foreign partners must submit letters of guarantee with the amount equivalent to the
aforesaid distribution of depreciation costs, presented by banks or financial institutions
within the territory of China (including those branch banks or affiliated agencies
established within the territory of China by overseas banks or overseas financial
institutions) so as to guarantee that the joint cooperative venture has the debt paying
ability.
Procedures of application and approval:
In case the joint cooperative venture's contract stipulates before the
establishment of the venture that foreign partners adopt the investment recovery measures
as described in Item 3 of Section 1, Article 44 of the Detailed Rules, the Chinese partner
shall first file an application to the financial organization with the aforesaid letters
of guarantee in accordance with the procedures. With the examination of and approval by
the financial organization, the application shall then be filed to the examining and
approving departments for examination and approval in line with Article 7 of the Detailed
Rules.
During the term of business operation of the joint cooperative venture,
in case foreign partners intend to recover their investment in advance through the means
as stipulated in Item 3, Section 1 of the said article, the joint cooperative venture
shall file an application to the examining and approving departments with the aforesaid
letters of guarantee in accordance with the procedures. The examination and approval
departments shall decide jointly with financial organizations whether or not to grant
approval within 60 days of receiving the aforesaid documents.
In case a joint cooperative venture needs to accelerate the
depreciation of the fixed assets so as to ensure the foreign partners to recover their
investment in advance, the joint cooperative venture, in addition to abiding by the
regulations as stipulated in the previous section, shall gain the approval by the State
Administration of Taxation in accordance with the relevant regulations of Detailed Rules
for the Implementation of the Income Tax Law of the People's Republic of China for
Enterprises with Foreign Investment and Foreign Enterprises.
"The examining and approving authorities" as mentioned in the
present Explanations refers to the Ministry of Foreign Trade and Economic Cooperation or
departments and provincial governments (departments in charge of foreign trade and
economic cooperation) authorized by the State Council.
"The finance and taxation authorities" refers to the
financial organizations and taxation authorities at the same level of the above-mentioned
examining and approving departments.
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