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Forms of Investment
Foreign investment attracted to China is generally in the form
of direct investment and in other forms as well. The form of direct
foreign investment most often adopted in China is for Sino-foreign
joint ventures, Sino-foreign cooperative ventures, wholly foreign-owned
ventures and cooperative exploitation. As China continues to open
the country wider to the outside world, there has been a gradual
increase in the forms of investment in the country, including that
of foreign-funded financial institutions. In particular, the form
of BOT (Build-Operation-Transfer) investment has been introduced
into China in recent years. Other forms of investment cover those
of compensation trade, processing and assembling operation and international
lease, which have all been the forms of foreign investment widely
used by China over the past more than 10 years. In making decisions
on investing in China, foreign investors, in accordance with their
own purposes and interests, may compare the characteristics and
advantages of various forms of investment before selecting an appropriate
form.
I. Sino-Foreign Joint Ventures
Sino-foreign joint ventures also refer to Chinese-foreign equity
joint-venture enterprises. They are the enterprises established
in China with joint investment from foreign companies, enterprises
and other economic organizations or individuals as well as from
Chinese companies, enterprises or other economic organizations.
Enterprises of this category have the characteristics that all the
parties participating in the joint venture jointly offer investment
in it, jointly operate it, share the risks of it in accordance with
their different proportions of investment, and are jointly held
responsible for the profits and losses of it. All the parties participating
in the joint venture can offer their investment in the form of currency,
or with buildings, machinery, equipment, the right to use the work
site, industrial property and exclusively-owned technology. The
proportions of investment offered by all the parties participating
in the joint venture are accordingly converted into ratios of investment.
Generally, the ratio of investment offered by the foreign party
participating in the joint venture shall not lower than 25%. The
corporate form of the Sino-foreign joint venture is the liability
limited company, with the Board of Directors being its supreme body
of power. Along with the development of China's experiment to introduce
the system of joint stock liability partnership, a small number
of Sino-foreign joint ventures have adopted the corporate form of
joint stock limited company.
II. Sino-Foreign Cooperative Ventures
Sino-foreign cooperative ventures also refer to Chinese-foreign
contractual joint ventures. They are the enterprises established
in China with investment or conditions for cooperation jointly offered
by foreign companies, enterprises, other economic organizations
or individuals as well as by Chinese companies, enterprises or other
economic organizations. Their largest difference from Sino-foreign
equity joint ventures is that the investment from the Chinese and
foreign parties participating in the cooperative venture will not
generally be converted into ratios of investment, and that they
will not share the profits in accordance with their ratios of investment.
The rights and obligations of all parties participating in the cooperative
venture, including the provision of investment and conditions for
cooperation, the distribution of profits or products, the sharing
of risks and losses, the form of operation and management, and the
ownership of property at the termination of the contracts, are all
defined in the contracts signed by all parties. In establishing
a Sino-foreign cooperative enterprise, the foreign party will generally
provide all or most of the funds while the Chinese party will offer
land, workshops, usable equipment, facilities, and sometimes a certain
proportion of funds. Normally, the Chinese and foreign parties participating
in the cooperative venture will define in their contracts that when
the duration of cooperation ends, all the assets of the cooperative
venture will be owned by the Chinese party, and that the foreign
party can first recoup its investment within the duration of cooperation.
Such a form of cooperation can not only meet the needs of Chinese
enterprises for sources of investment, but is also greatly attractive
to many foreign investors who are eager to recoup the investment.
III. Foreign Enterprises
Foreign enterprises in China also refer to wholly foreign-owned
enterprises, they are the enterprises established in China by foreign
companies, enterprises, other economic organizations or individuals
in accordance with Chinese law with all the investment solely offered
by foreign investors. According to China's law on foreign enterprises,
the establishment of foreign enterprises in China must be conducive
to the development of China's national economy, and must meet at
least one of the following requirements: that they will apply internationally
advanced technology and equipment, and that all or most of their
products will be export-oriented. The corporate form of foreign
enterprises in China is generally the liability limited company.
Along with the development of China's experiment to introduce the
system of joint stock partnership, a small number of foreign enterprises
in China have adopted the corporate form of joint stock limited
company. Although China was relatively late in introducing the system
of establishing foreign enterprises, the establishment of wholly
foreign-owned enterprises in the country has developed relatively
rapidly over recent years.
IV. Foreign-Funded Financial Institutions
Foreign-funded financial institutions in China refer to (1) branch
offices established in China with investment from foreign financial
institutions that are designed to engage in financial operations,
(2) wholly foreign-owned financial institutions with the Chinese
legal person status and (3) Sino-foreign joint-venture financial
institutions. They are foreign-funded enterprises in the field of
finance in China. Compared with general foreign-funded enterprises,
the major difference of foreign-funded financial institutions in
China is that most of them are established in the country as branch
offices of foreign financial institutions, e.g. branch offices of
foreign banks and insurance companies, without the Chinese legal
person status. Foreign-funded financial institutions already established
in China include foreign-funded banks, foreign-funded financial
companies and foreign-funded insurance companies. So far, the operations
of foreign-funded banks and foreign-funded financial companies in
China have been restricted within the framework of foreign exchange
financial operations, mainly including foreign exchange deposits,
foreign exchange loans, foreign exchange clearing and money remittance
as well as officially-approved operations of foreign exchange investment.
Their main business customers are foreign-funded enterprises, foreign
companies and foreigners. For foreign financial institutions applying
for the establishment of foreign-funded financial institutions in
China, their total assets must have reached a required scope, and
their countries of origin must have had a strict system of supervision
and control over financial operations and must have been operating
representative institutions in China for above two years. The application
for establishing foreign-funded financial institutions in China
must be made in accordance with relevant Chinese law and regulations,
and is subject to approval of competent State financial authorities.
V. Cooperative Exploitation
Cooperative exploration is an abbreviation for the cooperative
exploration and exploitation of offshore and land petroleum resources.
It is a form of international economic cooperation extensively adopted
in the exploitation of natural resources, with its most outstanding
characteristics being high risks, high investment and high returns.
So far, China's cooperation with other countries in the exploitation
of petroleum resources has all been conducted in this form. China
promulgated the ¡°Regulations of the People's Republic
of China on the exploitation of Offshore Petroleum Resources in
Cooperation with Foreign Enterprises¡± in January 1982
and the ¡°Regulations on Chinese-Foreign Cooperative Exploitation
of Land Petroleum Resources of the People's Republic of China¡±
in October 1993, which have clearly defined that, on the premise
that China's national sovereignty and economic interests are maintained,
foreign companies are allowed to participate in the cooperative
exploitation of petroleum resources of the People's Republic of
China.
Cooperative exploitation is normally conducted in the form of international
bidding. Foreign companies can separately make tenders or form consortia
in bidding for cooperative exploitation. Winners of the bid will
sign with the Chinese side contracts on cooperative exploration
and exploitation of petroleum resources to define the rights and
obligations of both sides. The duration of cooperation will generally
not exceed 30 years. The contracts on cooperative exploitation of
petroleum resources in China become valid with the approval of competent
authorities of foreign trade and economic cooperation. Cooperative
exploitation is generally carried out in three stages -- exploration,
exploitation and production. During the stage of exploration, the
foreign side will bear all the costs of the exploration, and take
all the risks arising from it. If no oil and gas deposits worth
exploitation are discovered at pre-determined areas defined in the
contracts during the stage of exploration, the contracts are automatically
terminated, and the Chinese side assumes no responsibility for making
any compensation. If oil and gas deposits worth exploitation are
discovered at pre-determined areas defined in the contracts during
this stage, the implementation of the contracts will enter the stage
of exploitation. During this stage, the Chinese side may purchase
shares in the joint exploitation with the foreign side, and the
two sides will both invest in the cooperative exploitation in accordance
with the ratios of investment agreed upon by both sides. But the
ratio of shares purchased by the Chinese side will not generally
exceed 51% in the maximum. When the oil and gas fields concerned
are put into commercial production during the third stage, relevant
taxes and fees arising from the use of the fields must first be
paid in accordance with Chinese Government regulations. After that,
the Chinese and foreign sides can recoup their investment and share
the profits in kind in line with the ratios concerning the sharing
of oil and gas as defined in relevant contracts. If the returns
are not sufficient enough to recoup all the investment and to gain
appropriate profits, each side will have to take its own risks accordingly.
The cooperation between China and foreign countries in joint exploitation
of petroleum resources in China is under the unified charge of China
National Offshore Oil Corporation and China National Oil and Gas
Corporation.
VI. BOT Investment Method
BOT is the initial form of BUILD-OPERATE-TRANSFER. A typical form
of BOT is that a government signs a contract with a project company
of the private sector (normally in the form of a foreign-funded
company in China), which obliges the project company to raise the
funds for the construction of an infrastructure facility and actually
undertakes its building. The project company shall own the facility
within the contract period and be responsible for its operation
and maintenance while recovering the capital investment and reaping
reasonable profits by collecting fees for use of the facility and/or
for the services it renders. Upon expiration of the contract, the
ownership of the facility shall be transferred to the government
gratuitously. The BOT investment form is used mainly for construction
of infrastructure facilities such as toll-charge highways, power
plants, railways, sewage treatment facilities and urban subways.
The application for the establishment of a BOT project in China
shall be subject to the procedure for official approval of the establishment
of foreign-funded enterprises currently in place.
For foreign-funded enterprises undertaking the construction of
BOT projects, they are eligible to enjoy the following preferential
policies on tax payment:
1. That they are eligible to pay the corporate income tax at a
rate of 15%;
2. That they shall be exempted from the corporate income tax for
the first and second years beginning from the first profit-making
year, and the rate on corporate income tax payable by them shall
be reduced by 50% between the third and fifth years (for three years);
and that for some particularly defined projects, they shall be exempted
from the corporate income tax for five years, and the rate on corporate
income tax payable by them shall be reduced by 50% also for five
years;
3. That where the operation term of a BOT project is shorter than
the number of years for the depreciation of fixed assets defined
by the Taxation Law, the party concerned may apply for official
approval for accelerating the depreciation of fixed assets during
the term of operation in line with relevant regulations. However,
as enterprises are based in different regions and as other conditions
for their operation are also different, the range of preferential
policies enjoyable by them shall be different accordingly.
For foreign investors investing in the construction of BOT projects
in China, they shall be identically eligible to enjoy the preferential
policies on tax payment. Foreign investors are exempted from paying
the withholding income tax on profits and dividends earned from
their investment in foreign-funded BOT projects in China. For the
interest on loans extended by foreign investors to foreign-funded
BOT projects in China, it can be listed as part of the cost of the
projects. However, foreign investors are liable to pay the withholding
income tax on the interest on their loans extended to foreign-funded
BOT projects in China in line with relevant regulations. Where the
loans have been transferred through State-run banks of China and
where the interest rate on them meets the standards on preferential
interest rates, the foreign investors concerned may apply for exemption
from paying the withholding income tax on the interest in line with
relevant regulations.
VII. Compensation Trade
Compensation trade is a form of investment integrating technology
trade, commodity trade and credit. Its basic meaning is that foreign
investors provide directly or on the basis of credit machinery and
equipment for Chinese enterprises. With products manufactured with
the equipment and technology provided, the Chinese enterprises concerned
will compensate by installments for the cost of the equipment and
technology provided and the interest arising from it. Major forms
of compensation trade include direct compensation, indirect compensation,
comprehensive compensation and labor compensation. In the form of
direct compensation, the Chinese enterprises concerned will compensate
for the cost of the equipment and technology provided by foreign
investors and the interest arising from it with products directly
manufactured with the equipment and technology provided. Direct
compensation is the most basic form of compensation trade. In the
form of indirect compensation, the Chinese enterprises concerned
will compensate for the cost of the equipment and technology provided
and the related interest with products manufactured otherwise by
them instead of those produced with the equipment and technology
provided. Comprehensive compensation means that the Chinese enterprises
concerned will compensate for the cost of the equipment and technology
provided and the related interest partially with products directly
made with the equipment and technology provided and partially with
products generated otherwise. Labor compensation means that the
Chinese enterprises concerned will compensate for the cost of the
equipment and technology provided and the related interest with
services of labor rather than products. In this form, the Chinese
enterprises concerned will make compensations by undertaking the
processing of materials supplied and assembling of components supplied
by the particular foreign investors. The import of machinery, equipment
and components needed for compensation trade is exempted from the
import tariffs and the Value-Added tax.
VIII. Processing and Assembling
The export-oriented operation of processing and assembling is a
general term for the processing of materials supplied, the assembling
of components supplied and the processing with designs supplied
by foreign investors. Processing and assembling are a form of foreign
economic cooperation, in which Chinese enterprises concerned will
undertake the operation of processing and assembling with raw and
auxiliary materials, parts and components as well as packaging materials
supplied by foreign investors in accordance with their requirements
concerned. The foreign investors concerned will be responsible for
marketing the products manufactured. The Chinese side will collect
service charges in foreign exchange.
The contracts on export-oriented operation of processing and assembling
become valid with the approval of competent authorities of the government
concerned. The State has adopted preferential policies on taxation,
customs supervision and import-export management concerning the
export-oriented operation of processing and assembling.
IX. Processing of Materials Imported
The operation of processing of materials imported refers to the
domestic processing of materials imported from international markets
into semi-finished or finished products, which will then be exported
to international markets.
China encourages the development of the operation of processing
of materials imported.
X. International Lease
Lease refers to a form of economic cooperation in which the leasor,
through a contract for lease, leases machinery, equipment and other
supplies to the leasee for a relatively long period of time, who
will use them for activities of production and business operation.
During the duration of lease, the leasor enjoys the ownership of
the leasehold while the leasee enjoys the right to use the leasehold
and is under the obligation to regularly pay a fixed rent. When
the duration of lease ends, the leasehold will be disposed of in
the way agreed upon by both parties. China operates the business
of international lease by leasing imported equipment mainly through
these two channels: (1) foreign leasing companies, and (2) Chinese
leasing companies. So far, the equipment China has leased through
the first channel mainly include civil aviation aircraft.
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