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Establishing a Trading Company in China

By Eunice Ku and Rosario Di Maggio, Dezan Shira & Associates
Posted: 5th April 2013 09:37
When an international company has reached a certain level of success in selling to or trading with China, or simply wants an on-the-ground presence in the country, it is common that a trading company is established in the form of a foreign-invested commercial enterprise (FICE).
 
The FICE structure has become the most common type of legal entity that foreign investors establish in China, as it is the most convenient, adequate and cost efficient type of business structure available for foreign traders wishing to conduct the following activities:
 
  • Expand their sourcing platform and take direct care of logistics and quality control
  • Purchase for the purpose of reselling finished or semi-finished products in China as an intermediary between Chinese suppliers and foreign China-based clients
  • Import goods to China to sell directly, either in wholesale or retail
  • Establish a fully operational China sales and after sales platform
  • Act as a business support and liaison office for their overseas headquarters, including setting up other branches and employing staff on a national basis.
 
Being consistent with the WTO commitments China agreed to in 2001, the Chinese authorities created the framework for FICE to operate in 2004 with the promulgation of the Administrative Measures for Foreign Investment in the Commercial Sector (“FICE Measures”).
 
The measures cover Sino-foreign equity/cooperative joint ventures as well as wholly foreign-owned enterprises (WFOEs) engaged in domestic retail, wholesale, commission agency, or franchising businesses. The FICE Measures removed previous restrictions on the establishment of wholly foreign owned trading entities.
 
A FICE is relatively easier to set up compared to a full manufacturing WFOE as the capitalization requirements are typically lower due to the absence of any imported machinery or tooling requirements. They are also more cost effective than representative offices.
 
However, from a legal, tax and accounting perspective, to establish and run a FICE requires both technical and administrative local knowledge.
 
It is important to ensure that the business model is feasible, that the foreign investor has a full understanding of the registration and post-registration procedures, company cash flows, and internal control processes.
 
Scope Covered
A FICE refers to a foreign-invested enterprise (FIE) that engages in the following activities:
 
  • Retailing: i.e. selling goods from fixed venues or via television, telephone, mail order, internet, and vending machines, and related services.
  • Wholesaling: i.e. selling goods to retailers and industrial, commercial or other customers and other wholesalers, and related services.
  • Franchising: i.e. authorizing the use of trademarks, trade names and operation models for remuneration or franchise fees through conclusion of contracts.
  • Commission agency activities: i.e. acting as sales agent, broker or auctioneer for goods, or as wholesaler charging fees and conducting sales for others’ goods and related services on a contractual basis.
 
There are two main types of FICE: retail FICE and wholesale FICE.
 
Retail FICE can, upon permission, engage in:
 
  • Retail of goods;
  • Import of goods dealt in by the FICE itself;
  • Purchase of domestic products for export; and
  • Other relevant ancillary business.
 
Wholesale FICE can engage in:
 
  • Wholesale of goods;
  • Commission agency (except auctioning);
  • Import and export of goods; and
  • Other relevant ancillary business.
 
A FICE can authorize others to open stores by way of franchising.
 
Basic Set-up Requirements
The foreign investor should meet the following criteria:
 
  • Has a good reputation
  • Has not committed any acts in violation of Chinese laws, administrative rules or regulations
  • Can meet the required ratio between registered capital and total investment
Limitations
Limitations apply to FICEs dealing in specific products such as books, periodicals, newspapers, pharmaceutical products, agricultural chemicals, agricultural films, chemical fertilizers, processed oil, grains, vegetable oil, edible sugar and cotton. If a foreign investor has more than 30 retail stores in China and distributes these products from different brands or suppliers, the foreign investor’s share in a retail enterprise is limited to 49 percent.
 
Retailing
Where the foreign investor wishes to apply to open a shop concurrently with the establishment of the FICE, the proposed shop must conform to the urban and commercial development plans of the city where it is situated, and a document issued by the local government evidencing the same will be required.
 
In addition, for stores with business areas of or above 3,000 square meters, the foreign investor will be required to submit a photocopy of the certification document for the right to use the land, and/or the premises lease agreement for the store.
 
Where a FICE that has already received permission to be established applies to open a shop, then in addition to meeting the above requirements, it must also have undergone annual inspection on time and passed, and have paid up all of its registered capital.
 
The land to be used by a FICE for opening a store must be commercial land obtained by means such as public invitation for bids, auction, and listing in accordance with the laws and administrative regulations relating to land administration.
 
Franchising
For foreign investors who would like to engage in franchising, they must also comply with the Administrative Regulations on Commercial Franchise adopted by the State Council in 2007.
 
Term of Operation
The term of operation of a FICE should generally not exceed 30 years, whereas a FICE set up in the central and western regions should generally not exceed 40 years.
 
Business Scope Expansion
Where an existing FIE wishes to engage in the commercial sector, it should amend its joint venture (JV) contract (applicable to JVs) and articles of association, fill out the relevant application forms, and submit them in accordance with the legal procedures for expanding an enterprise’s business scope. The specific method of distribution (i.e., wholesale, retail or commission agency) should be specified, and the list of the relevant products should be attached.
 
Application Documents
The application documents for establishing a FICE are as follows:
 
  • Written application form
  • Feasibility study report jointly signed by all investors
  • Contract, articles of association, and annexes thereto
  • Each investor’s bank credit certification, registration certification (photocopy), and legal representative certification
  • Identity certificate if the investor is an individual
  • Each investor’s audit report in the most recent year audited by an accounting firm
  • Evaluation report for state-owned assets to be invested by the Chinese investor into a Sino-foreign equity/cooperative JV commercial enterprise
  • Catalog of import and/or export commodities of the FICE
  • List of members of the board of directors of the FICE and the respective appointment letters from each investor
  • Enterprise name pre-approval notice enterprise issued by the administrative department for industry and commerce
  • For stores the size of 3000 square meters or above, land use right certification document (photocopy), and/or lease agreement for the store to be set up (photocopy)
  • Document issued by the in-charge commerce department stating that the store is in compliance with the relevant provisions concerning urban development and urban commercial development
 
Where documents are not signed by the legal representative, a power of attorney must be presented.
 
This article was first published on China Briefing.
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
For further details or to contact the firm, please email info@dezshira.com or visit www.dezshira.com.

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