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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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