[ By Dezan Shira & Associates ]
Introduction
China has permitted foreign direct investors to establish fully operational, 100 percent foreign owned retail and trading companies that can buy and sell in China, holding their own import-export licenses since June 2004.
Generally, such companies are inexpensive to establish, and if properly structured can be of great assistance to the foreign investor in combining both sourcing and quality control activities – increasingly vital in China given recent scandals over substandard foods and toys – with a purchasing and export facility, thus providing much more control and reaction times than if sourcing purely while based overseas. Such a trading operation, in terms of the legal structure, is known as a "FICE" - Foreign Invested Commercial Enterprise. In detail, the regulations governing FICEs apply to the following activities:
- import/export, distribution and retailing
- retailing – i.e. selling goods and related services to individual persons from a fixed location, aswell as through TV, telephone, mail order, internet, and vending machines
- wholesaling – i.e. selling goods and related services to companies and customers from industry, trade or other organizations
- representative transactions on the basis of provisions (agent, broker)
- franchising
It should also be noted that new regulations for operating commercial franchises came into effect on May 1, 2007. Generally speaking, these new laws reflect that the Chinese government is willing to adopt a more liberal regulatory system towards foreign enterprises operating in this field.
For businesses that are engaged in the import and export of product, a further incentive is that the FICE may have its own I/E license, thus saving on agent's fees. Be aware however that new regulations concerning the rebate, upon export of Chinese VAT (generally 17 percent of the purchase price) have been announced – please see the box entry on page six for details.
Set-up requirements
You must ensure that the registered capital is sufficient for your initial cash flow, not simply to satisfy regulatory needs. Have you considered all your working capital needs, and issues such as placing a bond with customs for imports? Or how to apply for VAT rebates on export? If not, you can get into trouble very quickly indeed if your registered capital needs are insufficient. This issue – often misunderstood - will be discussed later in this edition of China Briefing.
Business duration is limited to 30 years for foreign trading companies set up in the developed coastal areas – companies established in the west of China are allowed business duration of 40 years. Foreign companies shall “possess a sound reputation and comply with Chinese law.”
