China Law Advisory
New Law Impacts Distribution of Goods in China
By R.Z.
Margaret Lu
[March 2005]
A provision of a law published in June 2004 permitting foreign
companies to form either Sino-foreign joint ventures or wholly foreign
owned companies engaging in commissioned sales, wholesale, retail
and franchising businesses (“Foreign Invested Commercial Company”)
came into effect on Dec. 11, 2004. The following is a summary of
the implications of this new provision:
- A Foreign Invested Commercial Company may directly open retail
stores or license franchising stores. There is no geographic limitation
to its location and the location of its stores
- Foreign Invested Commercial Companies that plan on engaging
in distribution of books, newspapers and magazines, oil or pharmaceutical
products, tobaccos, fertilizers, automobiles and certain agricultural
products; franchise licensing and auction businesses must also
consult and comply with specific laws and regulations governing
these industry sectors
- Minimum capital (registered capital) required by the Company
Law of China is 500k Renminbi for wholesale and 300k Renminbi
for retail businesses, and the equity/debt ratio ranges from 7/10
to 1/3, depending upon the total amount of investment
- The duration can be no more than 30 years (40 years for Foreign
Invested Commercial Companies incorporated and located in Mid-Western
regions)
- Foreign investors must be of good reputation and credibility
with no prior records of violation of Chinese laws, regulations
or administrative rules
- Examination and approval authority for the establishment of
Foreign Invested Company and opening of its retail stores starts
with the provincial branches of the Ministry of Commerce, unless
delegated in certain cases
- Investors from Hong Kong, Macau and Taiwan are treated as foreign
investors by the new law in general
The new law is a welcome change, lifting prior restrictions and
offering U.S. companies another way to do business in China, but
it is too soon to predict how it will work. In the case where an
existing manufacturing foreign invested company contemplating to
broaden its distribution business scope pursuant to the new law,
for instance, it is unclear how it may retain preferential tax status
which is not awarded to Foreign Invested Commercial Companies. And,
it is unclear how different provinces and municipalities will react
to the new law. Officials from the Ministry of Commerce indicated
that it planned to provide further and continuous guidance on the
implementation of the new law.
U.S. companies with existing operations (such as manufacturing facilities,
Waigaoqiao trading companies and representative offices) in multiple
locations in China may benefit from consolidating and reorganizing
these operations under the new law, but should be cautious about
abandoning their current business model. Depending upon the products
and nature of business, for some U.S. companies, their existing
business models may still be the best strategy.
For more information, please contact:
This China Practice Advisory is a publication of the China Practice/Shanghai
Office of Davis Wright Tremaine LLP. Our purpose in publishing this
Advisory is to inform our clients and friends of recent legal developments
in China. It is not intended, nor should it be used, as a substitute
for specific legal advice as legal counsel may only be given in
response to inquiries regarding particular situations.
Copyright © 2005, Davis Wright Tremaine
LLP.
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