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the State Council Regulations for the Implementation of the Law on Sino-foreign Equity Joint Ventures (2001) (Promulgated 20 September 1983 by the State Council Revised 15 January 1986 by the State Council Revised 21 December 1987 by the State TABLE OF CONTENTSChapter I General Principles Chapter II Establishment and Registration Chapter III Form of Organization and Registered Capital Chapter IV Methods of Contributing Investment Chapter V Board of Directors and Management Office Chapter VI Introduction of Technology Chapter VII Right to the Use of Site and Its Fee Chapter VIII Purchasing and Selling Chapter IX Taxes Chapter X Foreign Exchange Control Chapter XI Financial Affairs and Accounting Chapter XII Staff and Workers Chapter XIII Trade Unions Chapter XIV Duration, Dissolution and Liquidation Chapter XV Settlement of Disputes Chapter XVI Supplementary Provisions Chapter I General Principles Article 1 These Regulations are formulated in order to facilitate the implementation of the Law of the People’s Republic of China on Sino-foreign Article 2 Sino-foreign equity joint ventures (hereinafter referred to as joint ventures) established within China’s territory in accordance Article 3 Joint ventures established within China’s territory must be able to promote the development of China’s economy and the improvement Businesses and industries in which the establishment of joint ventures is encouraged, prohibited or restricted by the State shall Article 4 Applications to establish joint ventures shall not be granted approval if the project involves any of the following conditions: (1) detriment to China’s sovereignty (2) violation of the Chinese law (3) nonconformity with the requirements of the development of China’s national economy (4) environmental pollution (5) obvious inequity in the agreements, contracts and articles of association signed impairing the rights and interests of one party Article 5 A joint venture has the right to do business independently within the scope of the provisions of Chinese laws, administrative regulations, Chapter II Establishment & Registration Article 6 The establishment of a joint venture in China shall be subject to examination and approval by the Ministry of Foreign Trade and Economic The State Council shall delegate to the people’s governments in provinces, autonomous regions and centrally administered municipalities (1) the total amount of investment is within the limit of the investment examination and approval power as stipulated by the State Council, (2) no additional allocations of raw materials by the State are required and the national balance of fuel, power, transportation and foreign Joint ventures established in accordance with provisions of the proceeding paragraph shall be reported to MOFTEC for the record. MOFTEC and the State Council authorized people’s governments in provinces, autonomous regions and centrally administered municipalities Article 7 When applying for establishing a joint venture, the foreign and Chinese parties shall jointly submit the following documents to the (1) an application for the establishment of a joint venture (2) the feasibility study report jointly prepared by the parties to the joint venture (3) joint venture agreement, contract and articles of association signed by representatives authorized by the parties to the venture (4) list of candidates for chairperson, vice-chairperson and directors nominated by the parties to the venture (5) other documents required The documents listed in the proceeding paragraph shall be written in Chinese. Documents (2), (3) and (4) may be written simultaneously Where any contents are found to be inappropriate in the submitted documents, the examination and approval authority shall demand an Article 8 Upon receipt of all the documents stipulated in Article 7 of these Regulations, the examination and approval authority shall, within Article 9 The applicant shall, within one (1) month after receipt of the certificate of approval, carry out registration procedures with the Article 10 The “joint venture agreement” mentioned in these Regulations refers to a document agreed upon by the parties to the joint venture If the parties to the joint venture agree to sign only a contract and articles of association, the agreement may be omitted. Article 11 The joint venture contract shall include the following main items: (1) the names, the countries of registration, the legal addresses of parties to the joint venture, and the names, professions and nationalities (2) name of the joint venture, its legal address, purpose and the scope and scale of business (3) total amount of investment and registered capital of the joint venture, investment contributed by the parties to the joint venture, (4) the ratio of profit distribution and losses to be borne by each party (5) the composition of the board of directors, the distribution of the number of directors. and the responsibilities, powers and means (6) the main production equipment and technology to be adopted and their source of supply (7) the ways and means of purchasing raw materials and selling finished products (8) principles governing the handling of finance, accounting and auditing (9) stipulations concerning labor management, wages, welfare and labor insurance (10) the duration of the joint venture. its dissolution and the procedure for liquidation (11) the liabilities for breach of contract (12) ways and procedures for settling disputes between the parties to the joint venture (13) the language used for the contract and the conditions for putting the contract into effect. The annex to the contract of a joint venture shall have equal validity with the contract itself. Article 12 The formation of a joint venture contract, its validity, interpretation, execution and the settlement of disputes under it shall be Article 13 Articles of association shall include the following main items: (1) the name of the joint venture and its legal address (2) the purpose, business scope and duration of the joint venture (3) the names, the countries of registration and the legal addresses of parties to the joint venture, and the names, professions and nationalities (4) total amount of investment and registered capital of the joint venture, investment contributed by the parties to the joint venture, (5) the composition of the board of directors, its re3ponsibilities, powers and rules of procedure, the term of office of the directors, (6) the setting up of management organizations, rules for handling routine affairs, the responsibilities of the general manager, deputy (7) principles governing finance, accounting and auditing (8) dissolution and liquidation (9) procedures for amendment of the articles of association Article 14 The agreement, contract and articles of association shall come into force after being approved by the examination and approval authority. Article 15 The examination and approval authority and the registration and administration office are responsible for supervising and inspecting Chapter III Forms of Organization & Registered Capital Article 16 A joint venture is a limited liability company. Each party to the joint venture assumes the liability of the joint venture within the limits of the capital subscribed by the party. Article 17 The total amount of investment (including loans) of a joint venture refers to the sum of capital construction funds and the circulating Article 18 The registered capital of a joint venture is the total capital registered at the registration and administration office for the establishment The registered capital shall generally be expressed in Renminbi, or may be in a foreign currency agreed upon by the parties to the Article 19 A joint venture shall not reduce its registered capital during the term of the joint venture. Where there is a real need for reduction Article 20 If one party to the joint venture intends to assign all or part of his investment subscribed to a third party, consent shall be obtained When one party assigns all or part of his investment to a third party, the other parties shall have a priority purchase right. When one party has his investment subscribed to a third party, the conditions given shall not be more favorable than those given the No assignment shall have effect should there be any violation of the above stipulations. Article 21 Any increase or reduction of the registered capital of a joint venture shall be approved by a meeting of the board of directors and Chapter IV Methods of Contributing Investment Article 22 Each party to a joint venture may contribute cash or buildings, factory premises, machinery, equipment or other materials, industrial Article 23 The foreign exchange contributed by the foreign party shall be converted into Renminbi according to the standard exchange rate announced Where the cash Renminbi contributed by the Chinese party is converted into foreign currency, it shall be converted according to the Article 24 The machinery, equipment and other materials contributed by the foreign party shall be those necessary for the production of the joint The price of the machinery, equipment and other materials referred in the proceeding paragraph shall not be higher than the current Article 25 The industrial property or proprietary technologies contributed by the foreign party as investment shall meet one of the following (1) capable of improving markedly the performance and quality of existing products and raising productivity (2) capable of notable savings in raw materials, fuel or power Article 26 Foreign parties who contribute industrial property or proprietary technologies as investment shall present relevant documentation Article 27 The machinery, equipment or other materials, industrial property or proprietary technologies contributed by foreign parties as investment Article 28 The parties to the joint venture shall pay in full the investment subscribed according to the time limit stipulated in the contract. Article 29 After the investment is paid up by the parties to the joint venture, a Chinese registered accountant shall verify it and provide a Chapter V Board of Directors & Management Office Article 30 The highest authority of the joint venture shall be its board of directors. It shall decide all major issues concerning the joint Article 31 The board of directors shall consist of no less than three (3) members. The distribution of the number of directors shall be ascertained The term of office for the directors is four (4) years. Their term of office may be renewed with the consent of the parties to the Article 32 The board of directors shall convene at least once every year. The meeting shall be called and presided over by the chairperson of Where the chairperson is unable to call the meeting, he/she shall authorize the vice-chairperson or other director to call and preside A board meeting requires a quorum of over two-thirds of the directors. Where the director is unable to attend, he/she shall present A board meeting shall generally be held at the location of the joint venture’s legal address. Article 33 Decisions on the following matters shall be made only after being unanimously agreed upon by the directors present at the board meeting: (1) amendment of the articles of association of the joint venture (2) termination and dissolution of the joint venture (3) increase or reduction of the registered capital of the joint venture (4) merger or division of the joint venture Decisions on other matters shall be made according to the rules of procedure stipulated in the articles of association. Article 34 The chairperson of the board is the legal representative of the joint venture. Where the chairperson is unable to exercise his/her Article 35 A joint venture shall establish a business management office that shall be responsible for daily business management. The business Article 36 The general manager shall carry out the decisions of the board meeting, organize and be responsible for the daily management of the Article 37 The general manager and deputy general managers shall be appointed by the board of directors of the joint venture. These positions At the invitation of the board of directors, the chairperson, vice-chairperson or other directors of the board may concurrently be In handling major issues, the general manager shall consult with the deputy general managers. The general manager or deputy general managers shall not hold posts concurrently as general manager or deputy general managers of Article 38 Where the general manager, deputy general managers or other senior management personnel practice favoritism or seriously abuse their Article 39 Where a joint venture needs to establish branch offices (including sales offices) outside China or in HongKong or Macao, it must report Chapter VI Introduction of Technology Article 40 The introduction of technology mentioned in this Chapter refers to the necessary technology obtained by the joint venture by means Article 41 The technology acquired by the joint venture shall be appropriate and advanced and enable the venture’s products to display conspicuous Article 42 The right of the joint venture to do business independently shall be maintained when making technology transfer agreements, and relevant Article 43 The technology transfer agreements signed by a joint venture shall be submitted for approval to the examination and approval authority Technology transfer agreements shall comply with the following stipulations: (1) the fees for use of technology shall be fair and reasonable (2) unless otherwise agreed upon by both parties, the technology exporting party shall not put any restrictions on the quantity, price (3) the term for a technology transfer agreement is generally no longer than ten years (4) after the expiry of a technology transfer agreement, the technology importing party shall have the right to use the technology continuously (5) conditions for mutual exchange of information on the improvement of technology by both parties of the technology transfer agreement (6) the technology importing party shall have the right to buy the equipment, parts and raw materials needed from sources they deem suitable (7) no unreasonably restrictive clauses prohibited by the Chinese law and regulations shall be included Chapter VII Right to the Use of Site and Its Fee Article 44 Joint ventures shall implement the principle of efficiency in the use of land. Any joint venture requiring the use of a site shall Article 45 If the Chinese party already has the right to the use of site for the joint venture, the Chinese party may use it as part of its investment. Article 46 The standard for a site use fee shall be stipulated by the people’s government of a province, autonomous region or centrally administered Article 47 Joint ventures engaged in agriculture and animal husbandry may, with the consent of the people’s government of the local province, Projects of a developmental nature in economically undeveloped areas may receive special preferential treatment in respect of site Article 48 The rates for site use fees shall not be subject to adjustment in the first five (5) years beginning from the day the land is used. Site use fees as part of the investment by the Chinese party shall not be subject to adjustment during the contract period. Article 49 The fee for the right to the use of site obtained by a joint venture according to Article 44 of these Regulations shall be paid annually Article 50 Joint ventures, in addition to obtaining site use right according to the provisions of this Chapter. may also acquire site use right Chapter VIII Purchasing & Selling Article 51 In its purchase of required machinery, equipment, raw materials, fuel, parts, means of transport and items for office use, etc. (hereinafter Article 52 The amount of materials needed for office and daily life for joint ventures purchased in China is not subject to restriction. Article 53 The Chinese Government encourages joint ventures to sell their products on the international market. Article 54 A joint venture has the right to export its products by itself or entrust sales agencies of the foreign party or Chinese foreign trade Article 55 Within the scope of operations stipulated in the contract, a joint venture may import machinery, equipment, parts, raw materials and A joint venture has the right to export its products by itself; for those products for which export licenses are required by state Article 56 With respect to prices for materials in China and fees charged for services such as water, electricity, gas, heat, transportation Article 57 A joint venture and other Chinese economic organizations shall, in their economic exchanges, undertake economic responsibilities and Article 58 A joint venture shall provide statistic data and submit statistic forms in accordance with the Law of the People’s Republic of China Chapter IX TAXES Article 59 Joint ventures shall pay taxes according to the stipulations of relevant laws of the People’s Republic of China. Article 60 Staff members and workers employed by joint ventures shall pay individual income tax according to the Individual Income Tax Law of Article 61 Taxes on the following imports by a joint venture shall be reduced or exempted in accordance with the relevant provisions of the Chinese (1) machinery, equipment, parts and other materials (“other materials” here and hereinafter mean required materials for the joint venture’s (2) machinery, equipment, parts and other materials imported with funds which are part of the joint venture’s total investment (3) machinery, equipment, parts and other materials imported by the joint venture with additional capital under the approval of the examination (4) raw materials, auxiliary materials, components, parts and packaging materials imported by the joint venture for production of export Taxes shall be paid or added according to regulations when the above-mentioned duty-free materials are approved for sale inside China Article 62 Except for those export items restricted by the State, taxes on export products of a joint venture shall be reduced, exempted or refunded Chapter X Foreign Exchange Control Article 63 All matters concerning foreign exchange for joint ventures shall be handled according to the Rules of the People’s Republic of China Article 64 With a business license, a joint venture may open foreign exchange accounts and Renminbi accounts with hanks inside China. The bank Article 65 A joint venture shall obtain
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