Legal Framework for Dong Trading Business in PRC
Foreign investors can carry on foreign and domestic trading business through the establishment of a foreign invested commercial enterprise (the FICE) under the PRC Law for Sino-foreign Equity Joint Venture, the PRC Law for the Sino-foreign Co-operative Joint Venture, and the PRC Law for Foreign Funded Enterprises.
Before China's WTO accession on December 11, 2001, the PRC Legislative body had amended three major pieces of the law for the Foreign Invested Enterprises (the FIE), including the removal of the requirements to:
to balance its receipt and payment of foreign currency;
to purchase from domestic market (the local contents);
to achieve export performance; and
to file the production plan with the government department for record.
In April 2004 the PRC Ministry of Commerce promulgated the Administrative Measures of the Commercial Sectors for Foreign Investment. The 2004 Administrative Measures provides for the basic legal rules for the establishment of the Foreign Invested Commercial Enterprises (the FICE). In addition, the Ministry of Commerce has issued other relevant administrative orders to make way for the implementation of the law on the liberalization of the wholesale and retail sectors since 2004.
Legal development After China's WTO accession
| Administrative order | Details of the administrative order | |
|---|---|---|
|
I |
Order No. 8 (2004) |
Chinese government fully opened up the distribution sectors to foreign investors |
|
II |
Order No. 9 (2005) |
Production type FIE can distribute third party goods by expanding scope of business |
|
III |
Order No. 76 (2005) |
FIE situated in free trade zone and bonded logistic park is granted the distribution rights to do trading with companies situated outside FTZ/BLP |
|
IV |
Order 94 (2005) |
Ministry of Commerce delegated its approval authority to provincial governments |
Entry Modes for Doing Trading Business
There are five entry modes to set up trading operations under the current PRC legal framework:
Production-type foreign investment enterprise (the FIE)
Existing production-type FIE expanding the business scope to trading
Sales branch set up by an FIE/FICE
FIE/FICE created in Special Economic Areas (free trade zone, export processing zone, and bonded logistic parks)
FICE created elsewhere in the PRC.
Procedures to set up a trading business in PRC
General
To set up a FICE, the investor must have obtained a name pre-approval and signed a lease agreement for an office, acceptable by the local Administration of Industry and Commerce for purpose of registration. The investor can be a foreign corporation or company, an individual who is a foreign national, or a resident of Hong Kong, Macau and Taiwan.
What particular information should be provided to set up a FICE?
The investor must prepare a list of commodities together with the commodity codes under the Harmonized System, intended to be traded for purposes of obtaining approval.
To set up a commercial enterprise (the FICE), the basic procedures are the same as setting up a manufacturing business. The investors of the FICE must prepare an Articles of Association and a feasibility study. In addition, the following information should be submitted to the approval authority for purposes of obtaining the approval:
|
Information required |
Wholesale business |
Retail business |
|
|---|---|---|---|
|
1 |
Lease agreement |
Yes |
Yes |
|
2 |
Name pre-approval |
Yes |
Yes |
|
3 |
Approval to set up |
Yes |
Yes |
|
4 |
Approval from the local Administration |
No |
No, if it is located in a shopping mall in general. |
|
5 |
Fire safety Certification |
No |
Yes, since the public can have access to the shops. |
|
6 |
Minimum registered capital (in general) |
RMB500,000 |
RMB300,000 |
|
7 |
Lists of the goods to be traded with HS coding |
Yes |
Yes |
|
8 |
Information of legal representative and other directors |
Yes |
Yes |
|
9 |
Board resolutions of the investors |
Yes |
Yes |
|
10 |
Notarized company documents of the investors |
Yes |
Yes |
The foreign investors should submit the above information to the approval authority in the city or district its business address is located. If the information is in order, the approval authority will issue the approval letter within a maximum period of three months. Note that if the approval authority does not grant the approval, it should inform the investors in writing and provide the reasons for not granting the approval.
After obtaining the approval letter, the foreign investor should apply to the local Administration of Industry and Commerce for a business license within 30 days. After obtaining the business license, the FICE comes into being and the incorporation procedure for the FICE is completed.
Goods subject to special regulations
Separate administrative licensing is required for the domestic distribution of certain goods. In addition, the amount for registered capital for the distribution of those goods may be bigger than a normal FICE.
|
Type of Goods for Domestic Trading |
Approval authority |
|
|
I |
Books, newspaper and magazines |
State Administration of Press and Publication |
|
II |
Pharmaceutical products |
State Administration of Food and Drugs |
|
III |
Possessed oil |
Ministry of Commerce; and Local Public Security Bureau |
|
IV |
Audio-video products |
Ministry of Culture |
Commodity Trading Rights in China
The Chinese government liberalized the availability of the trading rights to import and export goods from China (foreign trade rights) on July 2004. Early in June 2004, the Chinese government also lifted its restriction on foreign investment in the distribution service sectors. Foreign investors now can carry on foreign trade and provide wholesale and retail distribution services in China. The following is a brief introduction on the scope and contents of the trading rights in China.
If a Chinese company does not have the import export right, it does not have any customs declaration rights. All production type foreign investment enterprises acquire the import export right and declaration rights after obtaining the approval certificate and completing the customs registration. Production-type FIEs have the right to import materials for own use and export self-produced goods. They cannot import or export the goods without performing any processing activities, or act as third party distributors.
International couriers or transportation companies in China have the right to declare goods for their principles. However, they are not allowed to do import and export trading because they do not possess the trading rights. Furthermore, the declaration right is limited in that they cannot declare goods for behalf of those who are not the parties to the transport service agreement.
Professional customs declaration companies have the right to declare goods for their clients. They can declare goods at the customs as independent service providers. However, their scope of activities is limited to provide customs declaration services. They cannot be engaged in import and export trading activities in that they do not have the trading rights.
Goods imported to China or exported out of China are classified into the prohibited category, restricted category, or freely traded category. Foreign trading rights are subject to restrictions. Those who acquire the foreign trade right are not allowed to import or export goods of prohibited category, or deal with goods that are banned under the law. Goods bearing fake trademarks or firearms for example. In addition, the foreign trade right is subject to the compliance with the license requirements for imported and exported goods belonging to the restricted categories.
The trading right should also include the distribution rights, which can further be divided into wholesale distribution right and the retail distribution right. As from December 2004, foreign investors can set up wholly foreign own commercial enterprises to deliver services in the capacity of wholesaler or third party distributor or commission agents. However, the distribution right is not without limitations.
The foreign invested commercial enterprise does not have the distribution right for all types of commodities. To distribute certain specific goods, either the wholesaler or the retailer needs to obtain the commodity trading right from the PRC administrative body. Goods in China are also classified into the following categories: goods subject to state trading (such as silk and tea), goods subject to designated trading (such as steel and natural rubber), and general goods. For example, the right to wholesale distribution of processed oil is not available to foreign invested commercial enterprise until December 2006.
There is a requirement of administrative licensing for some commodity trading rights. In the case of retail distribution of books, newspaper and magazines, the retailer must obtain administrative approval to get an operating license for distribution of books, newspapers and magazines. Therefore, it is not sufficient for the foreign investment enterprise to have the business license alone. It must also obtain an operating license for the specific goods. The same licensing requirement applies to the distribution of pharmaceutical products, audio video products, food products, and cosmetics.
To sum up, the trading right in Chinese contexts has the following scope and contents: the import and export rights (foreign trade rights), declaration rights, wholesale distribution rights, retail distribution rights, and commodity trading rights. If one has not got any one of those, he or she cannot carry on one-stop shop trading activities in China.
A table may help illustrate the difference between trading right and declaration right
|
|
Import/export right (foreign trade rights) |
Customs declaration right |
|---|---|---|
|
Foreign invested wholesale commercial Enterprise |
Yes, it can do wholesale business, import and export own goods and third party goods |
Yes, but limited to the goods they buy and sell it their own name |
|
Foreign invested retail commercial Enterprise |
Yes, it can do retail business, import goods for own retail sale and export domestically purchased goods |
Yes, but limited to the goods they buy and sell it their own name |
|
Foreign (or import and export) trade corporation |
Yes, it can import and export own goods and third party goods, but does not have domestic distribution rights |
Yes, but limited to the goods they buy and sell it their own name distribution rights |
|
Production type FIE |
Yes, but limited to importing materials and exporting own made goods |
Yes, but limited to material imported for own use and export own made goods |
|
International transportation company |
No |
Yes, but limited to the goods of the shippers |
|
Professional declaration agency company |
No |
Yes, provide declaration services to any party who has the foreign trade right. |
Extracts of this Article are published by Hong Kong Federation of Industries in 2004.
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