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:
 
 
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:
 
 
There are two main types of FICE: retail FICE and wholesale FICE.
 
Retail FICE can, upon permission, engage in:
 
 
Wholesale FICE can engage in:
 
 
A FICE can authorize others to open stores by way of franchising.
 
Basic Set-up Requirements
The foreign investor should meet the following criteria:
 
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:
 
 
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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