Contractual or Cooperative Joint Venture (“CJV”)

A CJV differs from an EJV in two fundamental ways: a CJV does not have to be an independent legal entity from a legal formality perspective, can be an incorporated arrangement (with a limited liability company) or a contractual cooperation arrangement. For tax purposes, an incorporated CJV is subject to tax at the entity level. The tax treatment of a CJV under a contractual cooperation arrangement (whether it should be taxed at the level of the entity or as a flow-through entity) is unclear under the prevailing regulations. The ownership and profits/losses are not necessarily shared based on equity/capital contributions (as in the case of an EJV), but rather on the basis of a contractual agreement. Thus, a CJV may provide more flexibility with respect to profit-sharing and risk-taking among the partners, subject to approval by the authorities (e.g. the shareholder(s) may be guaranteed a certain fixed annual return without regard to the actual performance of the CJV).

Capital is contributed in a ratio agreed by the parties to the CJV contract and a joint venture partner. Normally, the Chinese partner may provide cooperation terms (i.e. the provision of services or the rental-free use of factory premises of the Chinese partner) to the CJV instead of contributing capital, subject to approval by the authorities.

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