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December 16, 2013

Wholesale & Retail

We are currently processing a 30 million USD wholesale and retail business formation project in Shanghai. If you are looking for some legal resources in this field, we hope you find our experience useful for reference.

Under Chinese law, wholesale and retail companies are regarded as “Commercial Enterprises”.  The establishment of foreign-funded commercial enterprises shall be allowed from December 11, 2004, pursuant to the Measures for the Administration on Foreign Investment in Commercial Field (hereinafter referred to as “MAFICF”).

Governing laws on wholesale and retail foreign investment are mainly stipulated in MAFICF and its Supplemental Provisions. The below are the most important parts for your reference.

  • Article 18: “Under the circumstance that the same foreign investor opens more than 30 stores accumulatively within China, if the goods it manages 1) include books, newspapers, magazines, automobiles (this restriction shall end on December 11, 2006), drugs, pesticides, agricultural films, fertilizers, refined oils, food, vegetable oil, sugar, cotton, and other commodities, and 2) the above commodities are of different brands and come from different suppliers, the proportion of capital contribution of the foreign investors shall not exceed 49%.”
  • Supplemental Provisions II of MAFICF came into effect on December 1, 2006, subject to Article 18, allowing investors from Hong Kong or Macau to hold no more than 65% shares.
  • Supplemental Provisions III of MAFICF came into effect on November 5, 2007, subject to Article 18 and Supplemental Provisions II, allowing the same investor from Hong Kong or Macau to open 50 stores (instead of 30).
  • Supplemental Provisions IV of MAFICF came into effect on February 5, 2009, subject to Article 18, allowing investors from Hong Kong or Macau to hold 100% shares.

Examples

ZARA

Chinese Company: 飒拉商业(上海)有限公司
Established: October 31, 2005
Shareholder(s) and shares: INDUSTRIA DE DISENO TEXTIL,S.A., 100%
Real investor’s nationality: Spain
Stores (in Shanghai): 5

H&M

Chinese Company: 海恩斯莫里斯(上海)商业有限公司
Established: November 9, 2006
Shareholder(s) and shares: H&M HENNES & MAURITZ HOLDING ASIA LIMITED, 100%
Real investor’s nationality: Sweden
Stores (in Shanghai): 5

Marks & Spencer

Chinese Company: 马莎商业(上海)有限公司
Established: November 27, 2007
Shareholder(s) and shares: MARKS AND SPENCER (HONG KONG) INVESTMENT LIMITED, 100%
Real investor’s nationality: United Kingdom
Stores (in Shanghai): 5

Business Scope & Restrictions

Business Scope

Foreign-funded enterprises that undertake retailing businesses may operate the following businesses upon approval:

    1. retailing of commodities;
    2. importing of self-managed commodities;
    3. purchasing domestic products for export; and
    4. other related businesses.

Foreign-funded enterprises that undertake wholesaling businesses may operate the following businesses upon approval:

    1. wholesaling of commodities;
    2. commission agency (excluding auction);
    3. importing and exporting of goods; and
    4. other related businesses;

A foreign-funded commercial enterprise may, upon approval, undertake one kind or several kinds of sales businesses. The kinds of commodities it manages shall be specified in the business scope prescribed in the contract or articles of association.

In addition to the above, a foreign-funded commercial enterprise may authorize others to open stores by way of franchising (refer to our article Franchising Your Way to China).

Restrictions

a. Where a foreign-funded commercial enterprise undertakes a business in books, newspapers, or periodicals, it shall conform to the Measures for theAdministration for Foreign-funded Distribution Enterprises of Books, Newspapers, or Periodicals.

b. Where a foreign-funded commercial enterprise undertakes a gas station business and deals with the retail of refined oil, it shall have a stable channel for supply of refined oil, conform to the construction plan of the local oil station, with the business establishments thereof corresponding with the existing state standards and the provisions on computation and checking procedures, and meet the requirements for fire control and environmental protection, etc. In addition, the specific implementation measures shall be formulated by theMinistry of Commerce.

c. Where a foreign-funded commercial enterprise manages drugs, it shall conform to the relevant standards for the administration of the drug sale. In addition, the specific implementation measures shall be formulated by theMinistry of Commerce.

d. Where a foreign-funded commercial enterprise manages automobiles, it shall manage within the approved business scope. In addition, the specific implementation measures shall be formulated by the Ministry of Commerce.

e. No wholesaling foreign-funded commercial enterprises may manage salt or tobacco, and no retailing foreign-funded commercial enterprises may manage tobacco.

f. Where a foreign-funded commercial enterprise manages auction business, it shall accord with the Auction Law, Laws on Cultural Relics, and other relevant laws, and shall be examined and approved by the Ministry of Commerce. The specific implementation measures shall be formulated additionally.

Government Bureaus & Authorities

The district Commission of Commerce accepts applications and issues approvals on the following projects: 1) total investment is under US$100 million, with the exception that there is an increased capital in the existing business over such amount; 2) the business shall not be categorized as one of the 23 vital industries; and 3) one single store occupy less than 1000 square meters.

The municipal Commission of Commerce accepts applications and issues approvals on the following projects: 1) one of the 23 vital industries; and 2) one single store occupying over 1000 square meters.

NOTE: The 23 vital industries are (including but not limited to): steel and iron, precious metal, ironstone, oil and fuel, natural rubber, books and printing, newspaper, periodicals (magazines), refined oil, pharmaceuticals, automobile, pesticides, agricultural film, salt, tobacco, chemical fertilizer, food, vegetable oil, sugar, cotton, audio and video products, crude oil, aluminum oxide and so on.


Eva’s Law and its associates provide legal consultancy and relevant assistance on Foreign Direct Investment. If you are interested in learning about our services, please email us at inquiry@evaslaw.com and we will get back to you as soon as possible.

December 16, 2013