International Audit Firms in China May Face End of Joint Venture Periods

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Uncertainty over joint venture renewals amid calls for local partner control

Jun. 23 – International audit firms operating in China may face potentially serious ownership challenges to their current legal structures in China relating to the expiry of their 20-year joint venture agreements.

China Briefing understands through an academic source, who wishes to remain anonymous due to the sensitivity of the issue, that several of the world’s leading audit firms face expiry of their joint venture terms in 2012, and another well-known international practice in 2017. With most of the larger international firms signing agreements back in 1992 to trade in China under joint venture structures, a political situation has arisen over the control and ownership of these franchises by Chinese partners.

Currently, under provisions strengthened by China’s WTO obligations, these joint ventures were permitted to retain de facto ownership under foreign partners, with many of the firms being managed by partners from Hong Kong or elsewhere. However, we understand that unofficially, the Chinese government wishes to see these joint venture arrangements move to limited liability partnerships in terms of legal structure.

This will impact on the qualifications required by non-mainland Chinese partners, who will need to take Chinese Certified Public Accounting (CPA) exams in order to qualify. These exams, which are set in Chinese, are among the most stringent and difficult to obtain qualifications worldwide within the accounting profession, with a pass rate of only 3 percent.

Quite how this situation will impact upon the legal structure of these joint ventures is uncertain; however China has long stated a desire to see the development of international firms’ audit practices under Chinese control. Intensive lobbying we understand is taking place between the firms concerned and the Chinese government over ensuring an orderly transition of legal structure for these businesses.

The issue will also begin to kick in for many other joint ventures, whose original contract and articles specified a 20-year term. With China really only beginning to open up for business in the early to mid-1990s, many longer term and well-established corporate businesses with Chinese joint venture partners will now need to look at extending these beyond their original lifespan, a procedure that requires government approval.

Dezan Shira & Associates can assist with the negotiation, applications, re-licensing and administration aspects concerning the extending of joint venture contracts in China. Please contact the firm at legal@dezshira.com for assistance.

Related Reading

China Briefing Guide to Establishing Joint Ventures (Third Edition)
This guide walks you through, step-by-step, each of the key points of setting up a joint venture in China. It includes a complete draft of both a JV contract and articles of association as well as an overview of JV laws, negotiation issues, land use rights, IP protection and technology transfer, in addition to tips on staff hiring and HR. It also describes tax and audit responsibilities in addition to buying out a JV partner and liquidating.

Administration Rules for Foreign Invested Partnerships

4 thoughts on “International Audit Firms in China May Face End of Joint Venture Periods

    Michael Bailey says:

    Very well spotted. It’ll mean a lot of mainland Chinese accounting managers will get to make partner sooner than they would expect in the West at the bigger firms. I doubt whether China has enough accounting / audit management professionals to take up the slack in experience or expertise, and it may additionally mean a dilution of standards and could conceivably usher in a reign of smaller professional firms concentrating on specific areas of expertise. Not unlike your own Dezan Shira in fact! A most interesting development and one to watch there’ll be a lot of water to flow under the bridge on this subject.

    Chris Devonshire-Ellis says:

    It’ll be interesting to see how the Government uses its new found political strength within such firms. Also, how Chinese Partners interact with their Global Partners. The market in China for professional audit and accounting services is going to get interesting.

    Frankie Fook-lun Leung says:

    Thirty years ago when I practiced law in Hong Kong, the major Big Eights (now Big Fours) used Hong Kong accountants to go into China as pioneers. Now the Chinese profession of accountants want to claim sovereignty over their profession. However, the quality of their services is not up to standard across the board. Many of the top guys envy the remuneration of accountants outside but they are not aware of their professional liability. I talked to some Chinese accountants and they felt that it is a humiliation that they cannot control their own profession in their own country.

    @Frankie – I agree 100%. What concerns me about the mainland China influence on Hong Kong (China auditors allowed to represent HK listed companies, etc) is that the lowest common denominator will kick in and erode Hong Kong’s previously high standards. I can see that creeping in already. – Chris

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