Laws of the People's Republic of China

The Ministry of Foreign Trade and Economic Cooperation

Circular of the Ministry of Foreign Trade and Economic Cooperation on Issuing the Interpretation on Implementing Certain Articles of the Rules for the Implementation of the Law of the People's Republic of China on Chinese-foreign Contractual Joint Ventures

WaiJingMaoFaFa [1996] No.658

October 22, 1996

The commissions (departments, bureaus) of foreign trade and economic cooperation of all provinces, autonomous regions, municipalities directly under the Central Government, Shantou, Zhuhai and municipalities separately listed on the State plan:

The Rules for the Implementation of the Law of People's Republic of China on Chinese-foreign Contractual Joint Ventures has been adopted by the State Council on August 7,1995, and promulgated by the Ministry of Foreign Trade and Economic Cooperation in the Decree No.6 on September 4,1995. We often receive requirements about some articles. The MOFTEC explained some articles of the Rules for the Implementation of Law of the People's Republic of China on Chinese-foreign Contractual Joint Ventures after negotiation with related departments, and it is hereby promulgated. Attachment:Interpretation on Implementing Certain Articles of the Rules for the Implementation of the Law of the People's Republic of China on Chinese-foreign Contractual Joint Ventures

The Rules for the Implementation of the Law of the People's Republic of China on Chinese-foreign Contractual Joint Ventures (hereinafter referred to as the Rules) were promulgated on and took effect as of September 4, 1995. Issues on the implementation of certain articles of the Rules are hereby interpreted as follows:

I.

Article 14 of the Rules stipulates:

"A contractual joint venture which has attained the status of a Chinese legal person in accordance with the law shall be a limited liability company. The parties to the venture shall bear liability for the contractual joint venture to the extent of their investment or of the conditions for cooperation they contribute, with the exception of those cases otherwise agreed in the contract. The contractual joint venture shall be liable for covering the debts of the venture with all its assets."

Interpretation: In accordance with the provisions of Paragraph 1 of this Article and Article 18 of the Company Law of the People's Republic of China, the organizational form of a contractual joint venture which has been established upon approval with the status of a Chinese legal person shall be a limited liability company.

II.

Article 18 of the Rules stipulates:

"The investment or conditions for cooperation contributed by the parties to the contractual joint venture may be provided in cash, in kind, industrial property rights, know-how technology, the right to the use of land or other property rights. In cases where the investment or conditions for cooperation contributed by the Chinese parties are parts of the State assets, they shall be valued according to the provisions of the relevant laws and administrative regulations. In cases where the contractual joint venture has attained the status of a Chinese legal person in accordance with the law, the investment contributed by foreign parties shall usually not be less than 25% of the registered capital of the contractual joint venture. In cases where the contractual joint venture has not attained the status of a Chinese legal person, the specific requirements as to the investment or conditions contributed by the parties to the contractual joint venture shall be stipulated by the Ministry of Foreign Trade and Economic Cooperation."

Interpretation: Investment as mentioned in Paragraph 1 of this Article refers to contributions made by the parties to the contractual joint venture in the form of cash, buildings, machinery and equipment, other goods and materials, industrial property rights, know-how technology, the right to the use of land, etc. upon being evaluated. Conditions for cooperation as mentioned in Paragraph 1 of this Article refer to real estate and other property rights provided by the parties to the contractual joint ventures, including the right to the use of land, ownership or the right to the use of buildings and other structures attached to the land and auxiliary equipment attached to buildings, industrial property rights, know-how technology and other property rights. Conditions for cooperation provided by the parties to the contractual joint venture are the property of the contractual joint venture and shall not be expressed in a monetary form, however, there must be auxiliary registration of these conditions which shall be used for assuming liability for the debts of the enterprise. Where the investment or conditions for cooperation provided by the Chinese parties must be valued in accordance with the provisions of relevant laws and administrative regulations, the valuation shall be conducted. The valuation result shall be treated as the basis of the negotiation for cooperation so as to prevent loss of the State assets. In cases where the contractual joint venture has not attained the status of a Chinese legal person, the investment contributed by foreign parties shall not be less than 25% of the total amount of the investment contributed by the Chinese and foreign parties.

III.

Article 44 of the Rules stipulates:

"Where it is agreed upon by the Chinese and foreign parties in the contract of the contractual joint venture that upon the expiration of the period of venture's operation all the fixed assets of the contractual joint venture shall be returned gratis to the Chinese party, the foreign party may, within the period of the ventures operation, apply to recover the investment ahead of time in the following ways: (1) to reach agreement in the contract of the contractual joint venture to enlarge the foreign party's proportion in the distribution of earnings on the basis of distribution according to the investment or conditions for cooperation provided; (2) when examined and approved by the financial and tax authorities in accordance with relevant tax provisions of the State, to recover its investment prior to the payment of income tax by the contractual joint venture; (3) to recover the investment by other methods which have been approved by the financial and tax authorities and the examination and approval authorities. If the foreign party is to recover its investment ahead of time during the period of the venture's operation according to the provisions of the preceding paragraph, the Chinese and foreign parties shall be liable for the debts of the contractual joint venture according to the provisions of the relevant laws and the agreement in the contractual joint venture contract."

Interpretation: All fixed assets of the contractual joint venture as mentioned in Paragraph 1 of this Article refer to the part of fixed assets among the residual assets after the contractual joint venture has conducted liquidation of assets, claims and debts of the contractual joint venture in accordance with the provisions of Article 24 of the Law of the people's Republic of China on Chinese-foreign Contractual Joint Venture and repayment of the debts of the enterprise. Upon expiration of the period of cooperation of the contractual joint venture, the Chinese party shall not distribute the fixed assets of the contractual joint venture ahead of time until the enterprise's liquidation expenses and debts have been paid.

Item 3 of Paragraph 1 of this Article refers to that the foreign party is allowed to recover its investment within the period of cooperation by taking the depreciation expenses for the fixed assets of the contractual joint venture upon approval by the financial and tax authorities and the examination and approval authorities. Where the assets of a contractual joint venture decrease as a result of the foreign party's drawing of the depreciation expenses for fixed assets of the contractual joint venture, the foreign party must provide a letter of guarantee for the equivalent amount issued by a bank or a financial institution within the territory of China (including branch banks or branches established within the territory of China by banks or financial institutions outside the territory of China) as security for the enterprise's ability to repay its debts.

Procedures for Submission for Approval:

Where it is agreed in a contractual joint venture contract before the establishment of a contractual joint venture that the foreign party is to take the way as mentioned in Item 3 of Paragraph 1 of Article 44 of the Rules, the Chinese party shall first lodge an application with the financial authority pursuant to procedures and submit the letter of guarantee mentioned above. After the application being consented upon examination and verification by the financial authority, it shall be reported to the examination and approval authority for examination and approval in accordance with the provisions of Article 7 of the Rules.

Where during the operation of the contractual joint venture the foreign party wants to recover its investment ahead of time in the way as stipulated in Item 3 of Paragraph 1 of this Article, the contractual joint venture shall lodge an application with the examination and approval authority pursuant to procedures and submit the letter of guarantee mentioned above. The examination and approval authority shall, in conjunction with the financial authority, examine and verify the application and decide whether or not to approve it within 60 days of receipt of the relevant documents mentioned above.

If a contractual joint venture needs to accelerate the depreciation of its fixed assets so that the foreign party can recover its investment ahead of time, in addition to observing the provisions of the preceding paragraph, the enterprise shall also, in accordance with the relevant provisions of the Rules for the Implementation of the Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises, obtain the approval of the State Administration of Taxation in advance.

"The examination and approval authority" as mentioned in this version refers to the Ministry of Foreign Trade and Economic Cooperation or a department authorized by the State Council and the local people's governments at the provincial level (the competent departments of foreign trade and economic cooperation).

"The financial and tax authorities" refer to the financial and tax authorities at the same level as the examination and approval authorities mentioned above.