Update: a joint venture between a foreign investor and a Mainland China partner

Structuring a joint venture between a foreign investor and a Mainland China partner has always sat at the convergence of two distinct legal orders. Recent shifts in the regulatory environment governing inbound foreign direct investment and the domestic approval architecture on the Mainland side have sharpened the compliance window. For foreign investors who have not revisited their structure since initial negotiations, the position may have moved beneath them.

A joint venture between a foreign investor and a Mainland China partner involves alignment of the vehicle type, the governing law, and the approvals sequence across both the Mainland regulatory regime and the structuring layer that typically sits in Hong Kong. The Foreign Investment Law of the People's Republic of China, together with its implementing regulations, is the governing instrument on the Mainland side; the Hong Kong holding layer engages the Companies Ordinance (Cap. 622) and the relevant offshore instruments where a BVI or Cayman intermediate entity is introduced. Parties should verify the current regulatory position before proceeding.

This briefing covers what has shifted, who is affected across the Hong Kong–Mainland corridor, and the immediate action required.

What Has Changed and Where the Pressure Now Falls

The Mainland's foreign investment regulatory architecture has consolidated. The single-window approval model has reduced the number of distinct filing steps, but the substantive conditions – including the Negative List restrictions, the requirements around registered capital, and the timing of the profit-repatriation mechanism – remain as exacting as before. What has changed is the tolerance for structural ambiguity.

Regulators on the Mainland side now expect the vehicle structure to be declared early. A foreign investor entering through a Hong Kong intermediate holding company must satisfy the relevant authorities that the Hong Kong entity has genuine substance, not merely a pass-through character. That requirement intersects directly with Hong Kong's foreign-sourced income exemption (FSIE) regime – the rules requiring economic substance in Hong Kong as a condition for access to Hong Kong's territorial tax treatment on foreign-sourced income, in force from 1 January 2023 as amended.

At the same time, the mechanism for repatriating profits through Hong Kong has come under closer scrutiny. The combination of the FSIE regime, the Pillar Two minimum top-up tax effective for fiscal years beginning on or after 1 January 2025 for in-scope groups, and the Mainland's own withholding tax rules means that a structure designed under an earlier set of conditions may now carry an unintended tax cost or a substance gap.

For foreign investors already in a Mainland joint venture, the risk is not hypothetical. Regulatory reviews of existing structures have become more common. The time to identify and address a gap is before a review is triggered, not in response to one.

Our cross-border practice has seen a marked increase in instructions from foreign principals reviewing existing joint-venture structures in light of these developments. In several matters, the structural issue was not in the Mainland entity itself but in the Hong Kong holding layer above it – a layer that the original advisers had treated as administrative rather than substantive.

Who Is Affected Across the Hong Kong–Mainland Corridor

The pressure point falls on three categories of cross-border participant.

First, foreign investors entering a new joint venture on the Mainland who have not yet committed to a vehicle structure. The choice between a wholly foreign-owned enterprise, an equity joint venture, and a contractual joint venture carries different governance, exit and repatriation implications. That choice interacts with the holding layer selected – whether Hong Kong, BVI, Cayman or a combination – and with the governing law of the joint-venture agreement. Getting the sequence wrong at this stage compresses the parties' options at every subsequent stage.

Second, existing joint-venture parties approaching a capital increase, a restructuring or an exit. These trigger events require fresh regulatory clearance on the Mainland side and, in many cases, a re-examination of the holding structure. A structure that was adequate at the time of formation may not satisfy current substance and approval requirements at the moment a corporate action is contemplated.

Third, foreign investors whose Mainland partner is itself restructuring. A change on the Mainland partner's side – including a change in ultimate ownership, a merger, or a default – can engage approval and consent obligations on the foreign investor's side that are not always visible in the joint-venture agreement alone. The enforcement position across the Hong Kong–Mainland corridor is directly relevant here. Since the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645) came into force on 29 January 2024, the cross-border enforcement picture for contractual disputes has changed materially.

For those with a pending or contemplated transaction, the window for proactive structural alignment is open now. Waiting until regulatory scrutiny arrives, or until a dispute crystallises, reduces the options available.

The sequence above describes the standard position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost. To discuss how the current regulatory position applies to your joint-venture structure across Hong Kong and the Mainland, contact info@lockhartyip.com.

The Immediate Action: Three Steps Before the Window Closes

For any foreign investor with Mainland joint-venture exposure, the immediate action has three components.

The first is a structural audit of the holding layer. The question is not whether the Hong Kong intermediate entity exists but whether it has the substance profile to sustain the position taken in the structure. That means reviewing the management, decision-making and operational footprint against the current FSIE and substance requirements.

The second is a review of the joint-venture agreement itself. The governing law clause, the dispute-resolution mechanism, and the exit provisions should be read against the current cross-border enforcement position. An arbitration clause seated in Hong Kong engages the Arbitration Ordinance (Cap. 609) and the interim-measures arrangement between the Mainland and the HKSAR – in effect since 1 October 2019 – which permits a party to a Hong Kong-seated arbitration to seek interim relief from Mainland courts. That mechanism is only available if the arbitration clause is correctly drafted and the seat is clearly specified. We regularly act on disputes where the clause is ambiguous on both points.

The third is verification of the current Mainland approval position. Regulatory requirements, including the Negative List and the sector-specific restrictions, are subject to revision. Parties should confirm the current position with advisers who have the relevant Mainland-law capacity before proceeding to signing or restructuring.

For a structured assessment of your joint-venture position across Hong Kong and the Mainland, write to us at info@lockhartyip.com.

For related analysis on cross-border M&A and transaction structuring, see our M&A & Transactions practice. For analysis of minority protection provisions in joint ventures structured across other corridors, see our discussion of minority protections in UK joint ventures and our matter note on minority protections in a Cyprus joint-venture context.

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This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.