An EJV is a limited liability company comprising at least one Chinese party and one foreign party. It is usually formed to maximise market exposure by combining foreign technology and cash on the one hand with accessibility to Chinese markets on the other. The proportion of equity capital contributed by the foreign party should not generally be less than 25% otherwise it may lose certain preferential tax treatments. In practice, most foreign parties make a 50% contribution or sometimes even higher if they want overall control over the EJV. The parties’ equity capital contributions make up the registered capital of the EJV which is held by them in proportion to their contributions. Profits are distributed to the parties in proportion to their equity contributions. EJVs are approved to operate for a limited term only, commonly 20-50 years. In some cases this can be unlimited if there is a transfer of “distinct technological advantage”.
A WFOE is a subsidiary company, wholly-owned by a foreign party or parties. It normally takes the form of a limited liability company. A WFOE is a Chinese legal entity with sole responsibility for managing its operations and with rights to sign its own contracts with local business partners and government authorities for the acquisition of land, receipt of utility services and rental of buildings. Registered capital can include cash and assets such as equipment and plant. The typical lifetime of a WFOE is between 15 and 30 years, but this may be extended to up to 40 years in some cases, subject to governmental approval.
In a country where “relationships” (guanxi) are imperative, the EJV can be an ideal corporate vehicle for SMEs because of the access it provides to local Chinese markets and to business and governmental contacts through the Chinese partner. However cultural and linguistic differences can sometimes lead to misunderstandings between parties and some SMEs have complained about the poor quality of local management, undisclosed employment and other social liabilities and improper “leakage” of intellectual property. This underlines the importance of conducting comprehensive due diligence on your Chinese partner before entering into an EJV and ensuring that your contractual relationship is fully documented and says the same thing in English as it does in Chinese. In recent years, the WFOE has become more popular with SMEs primarily because of the greater autonomy and flexibility offered by this form of corporate vehicle.
Free from the influence of a Chinese joint venture partner, the WFOE can establish its own corporate rules and culture. For those concerned about access to local markets and contacts, a common route is to appoint Chinese members to the board of other influential positions within the company. Notwithstanding the greater autonomy enjoyed by WFOEs, good legal advice is essential to ensure that all contracts entered into with Chinese counterparties are watertight.