Detailed Rules for the Implementation of the Law of the People's Republic of China on Sino-foreign Cooperative Enterprises - 1995

(Approved by the State Council on August 7, 1995 and promulgated by the Ministry of Foreign Trade and Economic Cooperation on September 4, 1995)

Table of Contents

Chapter I.   General Provisions

Article 1.

The Detailed Rules hereunder are formulated according to the stipulations of the "Law of the People's Republic of China on Sino-foreign Cooperative Enterprises".

Article 2.

The establishment of Sino-foreign cooperative enterprises (hereinafter referred to as "cooperative enterprises") within the Chinese territory shall comply with the State development policy and industrial policy; and shall abide by the provisions of the State Guidelines on Foreign Investment.

Article 3.

A cooperative enterprise shall have the right to do business and conduct business management activities independently within the scope of the provisions of Chinese laws and the approved agreement, contract and articles of association of the cooperative enterprise without interference from any organization or individual.

Article 4.

Cooperative enterprises shall include those cooperative enterprises that have obtained the status of a Chinese legal person in accordance with the law and those which do not have legal person status.

Special provisions in Chapter IX hereof shall apply to those cooperative enterprises without the status of a Chinese legal person.

Article 5.

Unless otherwise stipulated by law or administrative rules, the department in charge of a cooperative enterprise (the "department in charge") shall be the department in charge of the Chinese participant in such cooperative enterprise. Where a cooperative enterprise has two or more Chinese participants, the authorities for examination and approval together with the departments concerned shall consult to ascertain one department in charge.

The department in charge shall provide coordination to matters relating to cooperative enterprises and offer services in accordance with the law.

Chapter II.   Establishment of Cooperative Enterprises

Article 6.

The establishment of cooperative enterprises is subject to examination and approval by the Ministry of Foreign Trade & Economic Cooperation or other departments and local people's governments authorized by the State Council.

Where the establishment of a cooperative enterprise falls under one of the following circumstances, it shall be examined and approved by the departments authorized by the State Council or the local people's governments:

(1) The total amount of investment is within the limit of examination and approval by the departments authorized by the State Council or the local people's governments;

(2) Self-financed and no State balancing is required for construction and production conditions;

(3) No export quotas and licenses granted by the relevant State departments in charge are necessary for product export; or if necessary, those consents have already been acquired from the relevant State departments in charge prior to submitting the Project Proposal.

(4) Other circumstances under which the establishment of a cooperative enterprise must be examined and approved by the departments authorized by the State Council or the local people's governments as stipulated by law or administrative regulations.

Article 7. 

In order to establish a cooperative enterprise, the Chinese participant shall be responsible to submit the following documents to the examination and approval authority:

(1) The Project Proposal for the establishment of the cooperative enterprise, together with examination and approval documents of the department in charge;

(2) The Feasibility Study Report jointly prepared by the parties to the cooperative enterprise, together with examination and approval documents of the department in charge;

(3) Cooperative enterprise agreement, contract and articles of association signed by legal representatives or authorized representatives of the parties to the enterprise;

(4) The business licenses or registration certificates, credit certificate and valid certifying documents for the legal representatives of the parties to the cooperative enterprise. In the case that the foreign participant is a natural person, valid certifying documents concerning his or her identity, personal details and credit conditions shall be provided;

(5) List of candidates for chairman, vice chairman and directors of the Board of Directors of the cooperative enterprise, or director, deputy director and members of the Joint Management Committee ascertained through consultation by the parties to the cooperative enterprise;

(6) Other documents deemed as necessary by the examination and approval authority.

Except for documents provided by foreign participants as defined in Item (4) of this Article, other above-mentioned documents must be submitted in Chinese. The documents described in Items (2), (3) and (5) may also be written in any foreign language agreed upon by the parties to the enterprise as well as in Chinese.

Upon receipt of all the documents stipulated in this Article, the examination and approval authority shall, within 45 days, decide whether to approve or disapprove them. Should the examination and approval authority find the documents submitted to be incomplete or to contain anything inappropriate it shall have the right to require amendment or supplementary documents within a limited time.

Article 8.

Cooperative enterprises approved by the Ministry of Foreign Trade & Economic Cooperation and departments authorized by the State Council shall be issued an approval certificate by the Ministry of Foreign Trade & Economic Cooperation.

Cooperative enterprises approved by local governments authorized by the State Council shall be issued an approval certificate by the local government; and the approval documents shall be submitted to the Ministry of Foreign Trade & Economic Cooperation for recordation within 30 days of the date of approval.

The cooperative enterprise approved to be established shall, in accordance with the law, apply for registration with the Administration for Industry and Commerce and obtain a business license therefrom.

Article 9.

Applicants to establish a cooperative enterprise shall not be granted approval if any of the following circumstances exist:

(1) Detriment to China's sovereignty or public interests;

(2) Endangerment to State security.

(3) Causing environmental pollution;

(4) Other circumstances that violate Chinese laws, administrative regulations or national industrial policy.

Article 10. 

"Cooperative Enterprise Agreement" as referred to in these Detailed Rules means a written document agreed upon and concluded by the parties to the cooperative enterprise concerning the main issues and principles governing the establishment of a cooperative enterprise.

"Cooperative Enterprise Contract" as referred to in these Detailed Rules means a written document formed after the parties to a cooperative enterprise reach agreement over their mutual rights and obligations for the establishment of the cooperative enterprise.

"Articles of Association" as referred to in these Detailed Rules means a written document agreed upon by the parties to a cooperative enterprise stipulating the organizational principles and management methods of the cooperative enterprise in compliance with the provisions of the cooperative enterprise contract.

Where the cooperative enterprise agreement and the articles of association conflict with the cooperative enterprise contract, the contract shall prevail.

The cooperative enterprise agreement may be omitted by the cooperative parties.

Article 11.

The agreement, contract and articles of association of a cooperative enterprise shall come into force on the date of issuance of the approval certificate by the examination and approval authority. Within the term of the contract, any major changes to the agreement, contract or articles of association are subject to approval by the examination and approval authority.

Article 12.

The cooperative enterprise contract shall include the following items:

(1) Name, place of registration and legal address of the cooperative parties, and name, title and nationality of the legal representatives thereof (name, nationality and address shall be stated if the foreign participant is a natural person);

(2) Name, address and business scope of the cooperative enterprise;

(3) Total investment and registered capital of the cooperative enterprise, and agreement over the manner and term of each party's investment or provision of conditions for cooperation;

(4) Assignment of investment made or conditions for cooperation provided by each cooperative party;

(5) Distribution of profits or products to, and assumption of risks or risks by each cooperative party;

(6) The composition of the Board of Directors or the Joint Management Committee of the cooperative enterprise, the distribution of the number of Board directors or members of the Joint Management Committee, and the responsibilities, employment and dismissal for the general manager and other senior management personnel;

(7) The main production equipment and technology to be adopted and its origin;

(8) Product sales arrangement within and outside the territory of PRC;

(9) Arrangements regarding foreign exchange revenues and expenditures of the cooperative enterprise;

(10) Term, dissolution and liquidation of the cooperative enterprise;

(11) Other obligations of the cooperative parties and liability for breach of contract;

(12) Principles governing the handling of finance, accounting and auditing;

(13) Settlement of disputes amount the cooperative parties; and

(14) Procedures for amendment to the cooperative enterprise contract.

Article 13. 

The articles of association of the cooperative enterprise shall include the following items:

(1) Name and address of the cooperative enterprise;

(2) The business scope and term of the cooperative contract;

(3) Name, place of registration and legal address of the cooperative parties, and name, title and nationality of the legal representatives thereof (name, nationality and address shall be stated if the foreign participant is a natural person);

(4) Total investment and registered capital of the cooperative enterprise, and agreement over the manner and term of investment or provision of conditions for cooperation;

(5) Distribution of profits or products to, and assumption of risks or risks by each cooperative party;

(6) The composition, powers and rules of procedures of the Board of directors or the Joint Management Committee, and the responsibilities of the chairman or vice chairman of the Board, or director or deputy director of the Joint Management Committee;

(7) The establishment, authority and rules of procedures of the management structure, and the responsibilities of the general manager and other senior management personnel and their appointment and dismissal;

(8) Labor management stipulations concerning employment, training of staff and workers, labor contract, wage, social security, welfare and benefits, professional safety and hygiene, etc;

(9) Systems of finance, accounting and auditing of the cooperative enterprise;

(10) Dissolution of the cooperative enterprise and method for liquidation; and

(11) Procedures for amendment to the articles of association of the cooperative enterprise.

Chapter III.   Form of Organization and Registered Capital

Article 14.

A cooperative enterprise which obtains the status of a Chinese legal person in accordance with the law shall be a limited liability company. Unless the cooperative enterprise contract stipulates otherwise, the cooperative parties shall assume liability to the cooperative enterprise within the limits of the capital contributed or conditions for cooperation provided therefor.

A cooperative enterprise shall be responsible for its liabilities with its total assets.

Article 15.

The total investment of a cooperative enterprise refers to the sum of capital required to be invested for the production and business scope as stipulated in the contract and the articles of association of the cooperative enterprise.

Article 16.

The registered capital of a cooperative enterprise refers to the aggregate of capital subscribed by each cooperative party as registered at the Administration for Industry and Commerce for the establishment of the cooperative enterprise. The registered capital shall be expressed in Renminbi or in a convertible foreign currency agreed upon by each party.

The registered capital of the cooperative enterprise may not be reduced during the term of cooperation. However, if a reduction is necessitated by changes in the total investment and business scope, such reduction must be approved by the examination and approval authority.

Chapter IV .   Investment and Conditions for Cooperation

Article 17.

The cooperative parties shall invest in or provide conditions for cooperation to the cooperative enterprise pursuant to the provisions of relevant laws and administrative regulations and stipulations set forth in the cooperative enterprise contract.

Article 18.

Investment made or conditions for cooperation provided by the parties to a cooperative enterprise may be in cash, or may also be in kind or property rights such as industrial property, patented technologies or land use rights.

Where the investment or conditions for cooperation by the Chinese partner are in the form of State-owned assets, they shall be appraised and evaluated in accordance with the stipulations of relevant laws and administrative regulations.

In cooperative enterprises that have obtained the status of a Chinese legal person, the investment by foreign partners shall generally not be less than 25% of the registered capital of such enterprises. With respect to cooperative enterprises without the status of a Chinese legal person, the specific requirements concerning investment and conditions for cooperation by the cooperative parties shall be stipulated by the Ministry of Foreign Trade & Economic Cooperation.

Article 19.

The parties to the cooperative enterprise shall use self-owned properties or property rights as their investment or conditions for cooperation, but shall not raise a mortgage or other forms of guarantees based on such investment or conditions for cooperation.

Article 20.

The parties to the cooperative enterprise shall, based on production and operational requirements of the cooperative enterprise and pursuant to the stipulations of relevant laws and administrative regulations, stipulate in the contract the time limit for making investment to the cooperative enterprise or fulfilling the conditions for cooperation.

If the cooperative parties fail to invest in or fulfill the conditions for cooperation as stipulated in the cooperative enterprise contract, the Administration for Industry and Commerce shall set a deadline for such fulfillment; if obligations are still not fulfilled by said deadline, the examination and approval authority shall rescind the approval certificate of the cooperative enterprise, and the Administration for Industry and Commerce shall revoke the business license thereof and make a public announcement of such revocation.

Article 21.

The party which fails to invest or fulfill conditions for cooperation as stipulated in the cooperative enterprise contract shall be liable for breach of contract to the other party which has invested or fulfilled conditions for cooperation as stipulated in the cooperative enterprise contract and the articles of association.

Article 22.

After the investment is made or the conditions for cooperation are provided by the cooperative parties, a Chinese registered accountant shall verify it and provide a verification report, in accordance with which the cooperative enterprise shall issue to each party an investment certificate, which shall include the following items:

(1) name of the cooperative enterprise;

(2) date of the establishment of the cooperative enterprise;

(3) names of the cooperative parties;

(4) contents of investment or conditions for cooperation by the cooperative parties;

(5) date of such investment or conditions for cooperation are fulfilled by the cooperative parties;

(6) serial number and date of issuance of the investment certificate;

A copy of the investment certificate shall be sent to the examination and approval authority and the Administration for Industry and Commerce.

Article 23. 

The transfer all or part of rights under the cooperative enterprise contract among the cooperative parties or by a party to any person other than a party to the cooperative enterprise shall be subject to written approval by the other cooperative parties and shall be reported to the examination and approval authority for approval.

The examination and approval authority shall decide whether to approve or to disapprove within 30 days after receiving relevant transfer documents.

Chapter V .   Organizational Structure

Article 24.

The cooperative enterprise shall establish a Board of Directors or a Joint Management Committee. The Board of Directors (the "Board") or the Joint Management Committee ("JMC") is the highest authority of the cooperative enterprise, which shall decide all major issues concerning the cooperative enterprise pursuant to the stipulations of the articles of association.

Article 25.

The Board or JMC shall consist of no less than three members. The distribution of the number of directors shall be determined through consultation by the Chinese-foreign cooperative parties with reference to their investment or conditions for cooperation provided.

Article 26.

The directors or members of the JMC shall be appointed or replaced by the cooperative parties at their own will. The methods for electing the chairman or vice chairman of the Board, or the director or deputy director of JMC shall be set forth in the articles of association of the cooperative enterprise. Where either of the Chinese or the foreign party appoints the Board chairman or JMC director or deputy director, the other party shall appoint the vice chairman of the Board or the deputy director of the JMC.

Article 27.

The term of office for the directors or JMC members shall be set forth in the articles of association, provided that each term of office shall not exceed three years. At the end of their term of office such appointment may be renewed with the consent of the parties making the initial appointment.

Article 28.

The Board or JMC shall convene at least one meeting every year. The meeting shall be called and presided over by the chairman of the Board or director of JMC. Should the Board chairman or JMC director be unable to perform his duties for any extenuating reason, he shall authorize the vice chairman of the Board, the deputy director of JMC or other directors or JMC members to call and preside over the meeting. The Board or JMC meeting may be convened upon a proposal made by more than one-third of the directors or JMC members.

A Board or JMC meeting shall require a quorum of over two-thirds of the directors or JMC members. The directors or JMC members unable to attend such meeting shall authorize a proxy to represent him and vote for him. Any resolutions made at a meeting of the Board or JMC must be passed by a simple majority of the entire Board or JMC. If the directors or JMC members fail to attend the meeting without any appropriate reasons and no proxy is authorized for the meeting, such directors or JMC members shall be deemed to have attended the meeting but abstained from voting.

A notice shall be served to all directors or JMC members 10 days prior to any Board or JMC meeting.

The Board or JMC may also make decisions via telecommunication.

Article 29.

Decisions on the following issues must be passed by unanimous agreement of the directors or JMC members present at the Board or JMC meeting:

(1) Amendment of the articles of association of the cooperative enterprise;

(2) Increase or decrease of the registered capital of the cooperative enterprise;

(3) Dissolution of the cooperative enterprise;

(4) Mortgage of assets of the cooperative enterprise;

(5) Merger, separation, alteration of the organizational structure of the cooperative enterprise; and

(6) Other matters requiring unanimous approval at the Board or JMC meeting as agreed by the cooperative parties.

Article 30. 

Except for those stipulated herein, the rules of debate and voting procedures shall be set forth in the articles of association of the cooperative enterprise.

Article 31.

The Board chairman or JMC director is the legal representative of the cooperative enterprise. Should the Board chairman or JMC director be unable to perform his duties for any special reason, he shall authorize the vice chairman of the Board, the deputy director of JMC or other directors or JMC members to represent the cooperative enterprise.

Article 32.

The cooperative enterprise shall have a general manager who is responsible for daily management of the cooperative enterprise and is responsible to the Board or JMC.

The general manager shall be appointed and dismissed by the Board or JMC.

Article 33.

The positions of general manager and other senior management personnel may be held by Chinese citizens or foreign citizens.

At the appointment of the Board or JMC, the directors or JMC members may concurrently be the general manager or hold other senior management positions of the cooperative enterprise.

Article 34.

Subject to resolution of the Board or JMC, the general manager or other upper-level management personnel may be dismissed for incompetence or committing graft or serious dereliction of duty. Those who cause damages to the cooperative enterprise shall bear liability in accordance with the law.

Article 35.

Should the operation and management of the cooperative enterprise be entrusted to a party other than the cooperative parties to the enterprise, it must obtain unanimous approval of the Board or JMC and an Operation and Management Entrustment Contract shall be entered into with the entrusted party.

The cooperative enterprise shall submit such documents as the Board or JMC resolutions, the Operation and Management Entrustment Contract already executed and the credit certificate of the entrusted to the examination and approval authority for approval. The examination and approval authority shall decide to approve or disapprove within 30 days after receiving all relevant documents.

Chapter VI.   Procurement of Materials and Sales of Products

Article 36.

The cooperative enterprise shall formulate its production and operating plans pursuant to the approved business scope and production scale.

The government departments shall not force the cooperative enterprise to carry out the production and operating plans determined by the government departments.

Article 37.

The cooperative enterprise may independently decide on purchase of machinery equipment, raw materials, fuel, parts, fittings, components, means of transport and office supplies for its own use ("materials") within or outside the territory of the PRC.

Article 38.

The State encourages cooperative enterprises to sell their products on the international market. Cooperative enterprises may sell their products on the international market at their own discretion, or entrust foreign sales agencies or Chinese foreign trade corporations with sales on a commission or distribution basis.

The sales price of products of the cooperative enterprise shall be fixed by the cooperative enterprise in accordance with the law.

Article 39.

Customs duty and turnover tax in intermediate links for imported machinery equipment, parts and other objects contributed by a foreign partner as part of its investment as well as machinery equipment, parts and other objects imported by the cooperative enterprise for its production and operation using funds within the total investment. Taxes shall be paid or supplemented in accordance with the law when the above-mentioned duty-free materials are approved for sale inside China or transferred for the production of items to be sold on the Chinese domestic market.

Article 40.

A cooperative enterprise shall not export its products at a price obviously lower than the reasonable international price for the same kinds of products; and shall not import materials from abroad at a price higher than the international price for the same kinds of products.

Article 41.

The cooperative enterprise shall sell its products pursuant to the stipulations in the approved cooperative enterprise contract.

Article 42.

When importing or exporting commodities under permit administration or quota administration, the cooperative enterprise shall go through application and receipt procedures pursuant to the relevant State regulations.

Chapter VII.   Distribution of Earnings and Recovery of Investment

Article 43.

The Chinese and foreign partners may distribute earnings in the form of profit or product distribution or in other forms agreed upon by the cooperative parties.

Where earnings are distributed in form of product distribution or other forms, the taxes payable shall be calculated in accordance with relevant provisions of the Taxation Law.

Article 44.

If the ownership of all fixed assets of the cooperative enterprise reverts to the Chinese partner without charge upon expiration of the term of cooperation as agreed in the cooperative enterprise contract by the Chinese and foreign partners, the foreign partner may apply to recover its investment with priority during the term of cooperation in the following ways:

(1) On the basis of profit distribution in proportion to investment or conditions for cooperation provided, the percentage of profit distribution to the foreign partner is further increased through agreement in the cooperative enterprise contract;

(2) Subject to examination and approval by the financial and taxation authorities in accordance with relevant State taxation regulations, the foreign partner recovers its investment before the cooperative enterprise pays income tax.

(3) Other ways to recover investment approved by the financial and taxation authorities and the examination and approval authority.

Where the foreign partner recovers its investment with priority during the term of cooperation pursuant to the stipulations of the preceding paragraph, the Chinese and foreign partners shall, in accordance with the stipulations of the law and agreement in the cooperative enterprise contract, assume responsibility for the debts of the cooperative enterprise.

Article 45. 

Application for priority recovery of investment submitted by the foreign partner in accordance with stipulations of Items (2) and (3) of Article 44 hereof shall describe in detail the total amount of investment to be recovered with priority, term and method of recovery. Upon examination and approval by the financial and taxation authorities, the application shall be submitted to the examination and approval authority for approval.

The foreign partner may not make priority recovery of investment before any losses of the cooperative enterprise have been compensated.

Article 46.

The cooperative enterprise shall hire a Chinese registered accountant to check and verify the accounting books. The cooperative parties may jointly or separately entrust a Chinese registered accountant to check the accounts, with the necessary expenses to be borne by the entrusting party.

Chapter VIII.   Term and Dissolution

Article 47.

The term of a cooperative enterprise shall be determined through consultation by the Chinese and foreign partners and shall be stipulated in the cooperative enterprise contract.

If the Chinese and foreign partners agree to extend the term of cooperation upon the expiration of the term of the cooperative enterprise, an application shall be submitted to the examination and approval organ 180 days prior to the expiration of the term of cooperation, which shall explain the performance of the original cooperative enterprise contract and the reasons for extending the term of cooperation. The agreement regarding the partners' rights and obligations during the extended term reached by the partners shall be submitted concurrently. The examination and approval organ shall determine whether to approve or not within 30 days as of the date of receipt of such application.

Where the extended term of cooperation is approved, a cooperative enterprise shall register the changes with the administrative organ for industry and commerce upon the approval documents. The extended term shall be calculated as of the first day after the expiration of the term.

Where the cooperative enterprise contract stipulates that the foreign partner shall recover its investment with priority, and the investment has been recovered completely, the term of the cooperative enterprise shall not be extended; however, where the foreign partner increases the investment, subject to the partners' consultation and agreement, an application to extend the duration of the term of cooperation may be submitted to the examination and approval authority in accordance with the provisions of Clause 2 of this Article.

Article 48.

The cooperative enterprise shall be dissolved if any of the following events occurs:

(1) the term of cooperation expires;

(2) the cooperative enterprise is unable to continue operation due to the occurrence of heavy losses or grievous injury caused by force majeure;

(3) the cooperative enterprise is unable to continue operation because one or several partners fail to implement the obligations stipulated in the cooperative enterprise contract and the articles of association;

(4) an occurrence of other causes for dissolution as set forth in the cooperative enterprise contract and the articles of association;

(5) the cooperative enterprise violates laws and administrative regulations, and is ordered to be closed by law.

If the events described in Item (2) and Item (4) of this Article occur, the Board of Directors or the Joint Management Committee of the cooperative enterprise shall make a decision and submit it to the examination and approval authority for approval. In case of an event described in Item (3) of this Article, the Chinese or foreign party (parties) failing to fulfill the obligations set forth in the cooperative enterprise contract and articles of association shall be liable to damages thus caused to the other party (parties) that have fulfilled the obligations; The party (parties) fulfilling the obligations under the cooperative enterprise contract shall be entitled to apply for dissolution of the cooperative enterprise to the examination and approval authority.

Article 49. 

Liquidation of a cooperative enterprise shall be conducted in accordance with the provisions of relevant state laws, administrative laws and regulations, the cooperative enterprise contract and articles of association.

Chapter IX.   Special Provisions on Cooperative Enterprises without Legal Person Status

Article 50.

A cooperative enterprise without the status of a legal person and its partners shall undertake civil liability in accordance with relevant provisions of Chinese civil laws.

Article 51.

A cooperative enterprise without the status of a legal person shall register each partner's investment or cooperative conditions provided with the organs of the administration for industry and commerce.

Article 52.

The investment and cooperative conditions provided by the partners to the cooperative enterprise without the status of a legal person, shall be owned respectively by the partners; and subject to agreement by the partners, may also be owned jointly or a part of which may be owned separately while another part is owned jointly. The properties accumulated through operation by the enterprise shall be owned jointly by the partners.

The investment or cooperative conditions provided to the cooperative enterprise without the status of a legal person by the partners shall be subject to unified management and usage by the cooperative enterprise, and shall not be disposed of by any of the partners arbitrarily without the prior consent of the other partners.

Article 53.

A cooperative enterprise without the status of a legal person shall set up a joint management committee which shall be comprised of the representatives appointed by the partners and conduct joint management of the cooperative enterprise on behalf of the partners.

The joint management committee shall determine all major issues of the cooperative enterprise.

Article 54.

The cooperative enterprise without the status of a legal person shall establish unified accounting books where the enterprise is located; and the partners shall establish their respective accounting books.

Chapter X.   Supplementary Provisions

Article 55.

The execution, validity, interpretation, performance and settlement of disputes of the cooperative enterprise contract shall be governed by Chinese law.

Article 56.

The matters which are not provided for in these Detailed Rules including finance, account, audit, foreign exchange, taxation, labor management and trade union, etc., shall be carried out in accordance with the provisions of relevant laws and administrative laws and regulations.

Article 57.

Companies, enterprises, other economic organizations or individuals in Hong Kong, Macao and Taiwan as well as Chinese citizens living abroad who want to establish a cooperative enterprises shall handle such with reference to the stipulations of these Detailed Rules.

Article 58.

These Detailed Rules shall come into force as of the date of promulgation.

This translation, together with any explanatory material, is provided courtesy of Lehman Tax & Accounting.