PRC Sino-foreign Equity Joint Venture Law (2nd Revision)

The state shall not nationalize or expropriate joint ventures. Under special circumstances, in accordance with the public interest, a joint venture may be expropriated according to the procedure prescribed by law, in which case appropriate compensation shall be given.

Article 3: Joint venture agreements, contracts and articles of association concluded by the parties to a joint venture shall be reported to the state foreign economic relations and trade administrative department (hereafter, the "approval authority") for examination and approval. The approval authority shall decide, within 30 days, whether or not to approve a joint venture. Once approved, a joint venture shall be registered with the state industry and commerce administrative department, a business licence shall be obtained and operations shall begin.

Article 4: A joint venture shall take the form of a limited liability company.

The proportion of the investment contributed by the foreign party in the registered capital of a joint venture shall in general not be less than 25%.

The profits, risks and losses of a joint venture shall be shared by the parties to the venture in proportion to their contributions to the registered capital.

A party may only assign its share in the registered capital with the agreement of the other parties to the venture.

Article 5: Each party to a joint venture may contribute cash, material objects, industrial property rights, etc, as its investment in the venture.

The technology or equipment contributed by a foreign party as investment shall be truly advanced and appropriate to China's needs. Compensation shall be paid where losses are caused by fraud through the intentional provision of outdated equipment or technology.

The investment contributed by a Chinese investor may include the right to use a site provided for the joint venture during the term of its operation. Where the right to use a site does not constitute a part of the investment by the Chinese investor, the joint venture shall pay fees to the Chinese government for use of the site.

The various contributions referred to in this Article shall be specified in the contract concerning a joint venture or in its articles of association, and the value of each contribution (excluding that of the site) shall be ascertained by the parties to the venture through consultation.

Article 6: A joint venture shall establish a board of directors. The size and composition of the board of directors shall be determined through negotiations between the parties to the joint venture, and shall be stipulated in the contract and articles of association. Members of the board of directors shall be appointed and replaced by the parties to the joint venture. The chairman of the board and the vice-chairman of the board shall be determined through negotiation between the parties to the joint venture or elected by the board of directors. Where the post of chairman of the board is assumed by the Chinese party or the foreign party to the joint venture, [a member of] the other party shall assume the post of vice-chairman. The board of directors shall make major decisions concerning the joint venture based on the principles of equality and mutual benefit.

The powers and functions of the board of directors shall be to discuss and decide in accordance with the provisions of the articles of association of the joint venture, all major problems concerning the venture, namely, development plans, production and business plans, the budget, distribution of profits, manpower and pay scale plans, the termination of business and the appointment or recruitment of the general manager, the deputy general manager, the chief engineer, the chief accountant and the auditor as well as their functions and powers and their remuneration, etc.

The general manager and deputy general manager shall be chosen from the parties to the joint venture.

Matters concerning the employment, discharge, remuneration, benefits, labour protection, labour insurance, etc. of the workers and staff of a joint venture shall be stipulated in accordance with the law through the conclusion of a contract.

Article 7: Workers and staff of a joint venture may, in accordance with the law, establish trade union organizations to conduct trade union activities and safeguard the lawful rights and interests of workers and staff.

A joint venture shall provide its trade union necessary conditions for the union's activities.

Article 8: The net profit of a joint venture shall be distributed to the parties to the venture in proportion to their respective shares in the registered capital after the payment of joint venture income tax in accordance to the tax laws of the People's Republic of China and after deductions for the reserve fund, the bonus and welfare fund for workers and staff and the expansion fund of the venture as stipulated in the articles of association of the joint venture.

A joint venture may, in accordance with relevant tax laws and administrative regulations of the state, enjoy preferential tax reductions or exemptions.

A foreign party that re-invests its share of the net profit within Chinese territory may apply for the reimbursement of a part of the income taxes already paid.

Article 9: A joint venture shall, on the strength of its business licence, open a foreign exchange account with a bank or other financial institution permitted by the state foreign exchange control authority to engage in foreign exchange transactions.

A joint venture shall conduct its foreign exchange transactions in accordance with the regulations of the People's Republic of China for the administration of foreign exchange.

A joint venture may, in its business activities, directly borrow funds from foreign banks.

Any insurance policy taken out by a joint venture shall be taken out with an insurance company within China.

Article 10: Materials, such as raw materials and fuel, which are required under the approved scope of operation of a joint venture, may be purchased on the domestic market or international market according to the principles of fairness and reasonableness.

A joint venture is encouraged to sell its products outside China. It may distribute its export products on foreign markets directly or through relevant agencies or China's foreign trade organizations. Its products may also be distributed on the Chinese market.

When necessary, a joint venture may establish branch organizations outside China.

Article 11: A foreign joint venture party may, using the currencies stipulated in the joint venture contract and in accordance with foreign exchange administration regulations, remit abroad the net share of profits distributed to it after performance of its obligations as stipulated by the law, agreements and contracts, and the funds distributed to it following the expiry or suspension of a joint venture and other funds.

A foreign party shall be encouraged to deposit the foreign exchange that it is entitled to remit abroad in the Bank of China.

Article 12: The wage income and other lawful income of expatriate employees of joint ventures, after the payment of individual income tax in accordance with PRC tax law, may be remitted abroad in accordance with foreign exchange administration regulations.

Article 13: A joint venture's term of operation shall be stipulated in accordance with the type of industry, and individual circumstances. For joint ventures in some industries, the period of operation shall be fixed, and for joint ventures in other industries a period of operation may or may not be fixed. Where the period of operation is stipulated for a joint venture and the parties agree to extend the period of operation, they shall, six months prior to the expiry of the operation period, apply to the approval authority. The approval authority shall decide whether or not to approve the extension within one month of the date of receiving the extension application.

Article 14: The joint venture contract may be terminated upon agreement by the parties to the joint venture, pursuant to approval by the approval authority and registration with the state industry and commerce administration department where heavy losses occur in a joint venture, where one party fails to perform its duties under the contract or the articles of association, or where there occurs an event of force majeure and in other situations. Where economic losses are caused by breach of contract, the party in breach of contract shall be liable for such losses.

Article 15: Disputes between the parties to a joint venture that its board of directors fails to resolve through consultation may be resolved through conciliation or arbitration by an arbitral body in China or through arbitration by an arbitral body agreed upon by the parties.

If the parties to the equity joint venture have not made an arbitration clause in their contract or have not subsequently reached an arbitration agreement in writing, they may institute lawsuits in a people's court.

Article 16: This Law shall be effective as of the date of promulgation.