Opportunities for Foreign Investment in the Distribution Sector

Opportunities for Foreign Investment in the Distribution Sector

Contents Introduction 2 Foreign Investment Commercial Enterprise ( FICE ) 2 Conditions 2 Permitted Business Activities 3 Franchising 3 Range of Products 3 Establishment Procedure 3 Establishment of Outlets 4 Special Provisions Regarding Hong Kong and Macau Service Suppliers 5 How Deacons can help with establishing a Foreign Investment Commercial Enterprise 5

Introduction China has traditionally restricted foreign investment in the retail and wholesale sectors with the aim of nurturing strong domestic players before their foreign counterparts would be allowed to enter the country. Since becoming a member of the World Trade Organisation, China has gradually opened up its distribution sector to foreign investment. The revised policy is implemented through a number of regulations of which the key ones are as follows: the Measures for the Administration of Foreign Investment in the Commercial Sector (the Commercial Measures ), (effective from 1 June 2004) and its various subsequent supplements; the Notice of the Ministry of Commerce on Entrusting Local Authorities with the Examination and Approval of Commercial Enterprises with Foreign Investment (effective from 1 March 2006); and the Circular on Delegating Matters Concerning the Examination and Approval of Foreign Investment Commercial Enterprises (effective from 12 September 2008). These developments in the distribution sector go hand in hand with other policy changes which have given foreign investors greater access to China s domestic market. Investors should pay attention to any further liberalisation policies in the various free trade zones in China. This leaflet discusses the key elements of the regulatory framework for foreign investment in the distribution sector in China. Foreign Investment Commercial Enterprise ( FICE ) Foreign investors are generally permitted to engage in 4 forms of distribution activities: commission agent s services; wholesaling; retailing; and franchising. A foreign investor is required to establish a FICE if it wishes to engage in these distribution activities. The investors in FICE can be foreign companies, enterprises or other economic organisations as well as foreign individuals. Foreign investors may establish a FICE with a Chinese party as a joint venture or on their own as a wholly foreign-owned enterprise. However, not all FICEs may be wholly owned by a foreign investor. A FICE with more than 30 outlets dealing in certain specified products of different brands that are sourced from different suppliers shall generally take the form of a joint venture in which the maximum share of the foreign investor is limited to 49%. The specified products include books, newspapers, periodicals, pharmaceutical products, pesticides, mulching films, chemical fertilizers, processed oil, staple food, vegetable oil, edible sugar and cotton etc. Also, FICEs are prohibited from engaging in the wholesale of salt and tobacco and in the retail of tobacco. Conditions The foreign investor should have a good reputation and comply with PRC law. Whereas there is no statutory requirement of minimum registered capital, the authority in charge of approving the establishment of a FICE may require certain amount of registered capital to match the proposed scale of business of the FICE. The investment must comply with the minimum debt to equity (registered capital) ratios imposed under PRC law. The term of operation should not normally be longer than 30 years but may be extended to 40 years if the FICE is established in the central and western regions of China. 2 Opportunities for Foreign Investment in the Distribution Sector

Permitted Business Activities A retail FICE may engage in the following business activities: commodity retailing; commodity import for its own account; sourcing of domestic products for export; and other relevant ancillary activities. A wholesale FICE may engage in the following business activities: commodity wholesale; commission agents services (excluding auctions); commodity import-export; and other relevant ancillary activities. A FICE may engage in one or more of the business activities set forth above and may authorise third parties to open franchise shops. Franchising The Commercial Measures do not contain detailed guidelines regarding the operation of franchising business. According to the Regulations for the Administration of Commercial Franchising Operations ( Franchising Regulations ) (effective from 1 May 2007), a franchisor must have operated at least 2 directly owned stores for more than 1 year before it may lawfully grant franchises. More administrative measures were promulgated to strengthen supervision of franchising operations, such as the Administrative Measures for Record-Filing of Commercial Franchises (effective from 1 February 2012) and the Administrative Measures for Information Disclosure of Commercial Franchises (effective from 1 April 2012). Range of Products A FICE must specify the range of products it distributes in the business scope of its corporate establishment documents. A FICE is only permitted to deal in those types of products listed in its business scope. The import and distribution of certain categories of products in China are subject to various forms of state control. If the products in which a FICE deals are products subject to special State regulations or are import-export products which are subject to quota or licensing control, the FICE must comply with the relevant licensing requirements. Establishment Procedure Whilst the Ministry of Commerce ( MOFCOM ) is the principal approval authority for FICE, it has delegated its approval powers with respect to most types of FICE to the provincial level departments in charge of commerce ( provincial commerce authorities ). Within the scope of these delegated powers, the provincial commerce authorities can autonomously approve the establishment of FICE and they are only required to report the matter to MOFCOM for record. A FICE is still subject to MOFCOM approval if: its mode of operations involves sales, without setting up shops (outlets), such as through television, telephone, mail order, etc; or it wholesales audiovisual products, or distributes books, newspapers or periodicals. 3 Opportunities for Foreign Investment in the Distribution Sector

In those instances where approval by MOFCOM is required, an application for the establishment of a FICE must be submitted first to the provincial commerce authority in the proposed investment location. After preliminary examination, the provincial commerce authority will forward the application to MOFCOM within 1 month. MOFCOM will then have 3 further months to decide whether or not to approve the application. In some localities, the approval powers in respect of certain types of FICE have been further delegated to the municipal level department in charge of commerce ( municipal commerce authorities ). For example, in Guangdong province, according to the Guidance Notes on the Assessment of Foreign-invested Commercial Projects in the Guangdong Province (the Guidance Notes of Guangdong ) (effective from 27 July 2009), the wholesale of general commodities (with certain exceptions), commission agent s services (excluding auctions), or import and export businesses, may be approved by the municipal commerce authorities. Having said that, the approval powers of the municipal commerce authorities may vary from locality to locality. In this regard, foreign investors are recommended to seek professional advice to ascertain the approval requirements as applicable to the relevant locality from time to time. If an existing foreign investment enterprise intends to expand its business scope to include distribution rights and become a FICE, it must proceed in accordance with the approval procedure and principles for the establishment of a new FICE set forth above. Establishment of Outlets FICE may set up shops (outlets) on condition that their establishment complies with the regulations regarding urban development and urban commercial development. MOFCOM is the approval authority for the opening of new outlets by FICE. Provincial commerce authorities are authorised, however, to approve new outlets in the following 3 situations: the area of a single outlet does not exceed 5,000 square meters and there are not more than 3 outlets in total, and the foreign investor has not opened more than 30 outlets in the same class in China through FICE; the area of a single outlet does not exceed 3,000 square meters and there are not more than 5 outlets in total, and the foreign investor has not opened more than 50 outlets in the same class in China through FICE; or the area of a single outlet does not exceed 300 square meters. Under the above circumstances, the provincial commerce authorities are only required to report the approval for the establishment of outlets to MOFCOM. Some provincial commerce authorities have further delegated such approval powers to the municipal commerce authorities. For example, according to the Guidance Notes of Guangdong, the municipal commerce authorities may approve new outlets in the following 2 situations: a Hong Kong/ Macau service supplier opens outlets in the local municipal administrative district with the area of a single outlet not exceeding 300 square meters and there are not more than 10 outlets in total in a single application; or the area of a single outlet does not exceed 3,000 square meters (only 1 outlet is allowed in a single application). As in the case of the establishment of FICEs, the approval powers of the municipal commerce authorities for the establishment of outlets may vary from locality to locality. In this regard, foreign investors are recommended to seek professional advice to ascertain the approval requirements as applicable to the relevant locality from time to time. 4 Opportunities for Foreign Investment in the Distribution Sector

Special Provisions Regarding Hong Kong and Macau Service Suppliers Qualified Hong Kong and Macau service suppliers (collectively referred to as SAR Suppliers ) are granted greater access to the distribution sector than other service suppliers under the provisions of the Closer Economic Partnership Arrangements which Mainland China has concluded with Hong Kong and Macau. For example, there are preferential treatments for a SAR Supplier who/which has opened more than 50 stores accumulatively in Guangdong to engage in distribution of mulching films, chemical fertilizers, vegetable oil and edible sugar on a wholly-owned basis if those goods are of different brands and come from different suppliers; whereas for staple foods, the SAR Supplier is only allowed to conduct pilot operation on a wholly-owned basis in Guangdong province. How Deacons can help with establishing a Foreign Investment Commercial Enterprise Deacons is Hong Kong s own world class law firm, and one of the region s leaders in advising investors and trading companies on the opportunities available in the PRC. We were the first foreign law firm with 3 representative offices in the major Chinese cities of Beijing, Shanghai and Guangzhou. Deacons can assist in the establishment of a FICE, including the establishment of an overseas special purpose vehicle to hold the interest in the FICE and the approval and licensing of the FICE and its outlets inside China. For more information on how Deacons can help, please contact one of our Corporate Commercial Group members listed below. Want to know more? Keith Cole keith.cole@deacons.com.hk +852 2825 9532 Franki Cheung * franki.cheung@deacons.com.hk +852 2825 9499 Cynthia Chung cynthia.chung@deacons.com.hk +852 2825 9297 Toh Guat Kim kim.toh@deacons.com.hk +852 2825 9622 Edwarde Webre edwarde.webre@deacons.com.hk +852 2825 9730 Myles Seto myles.seto@deacons.com.hk +852 2825 9754 Machiuanna Chu machiuanna.chu@deacons.com.hk +852 2825 9630 Iris Cheng iris.cheng@deacons.com.hk +852 2825 9458 Hiroko Nakamura hiroko.nakamura@deacons.com.hk +852 2825 9200 Helen Lu helen.lu@deacons.com.cn +86 10 8518 2338 * China-Appointed Attesting Officer Jenny Jin jenny.jin@deacons.com.cn +86 21 6340 3588 Joyce Mu joyce.mu@deacons.com.cn +86 20 8778 5678 0515 Deacons 2015 Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice. If you would like advice on any of the issues raised, please speak to any of the contacts listed.

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