1. Experimental Measures on Commercial Foreign-Invested Enterprises
Issued by the State Economic and Trade Commission and the Ministry of Foreign Trade And Economic Cooperation
These Measures, promulgated on June 25, 1999, were formulated in accordance with the PRC Sino-Foreign Equity Joint Venture Law, the PRC Sino-Foreign Cooperative Joint Venture Law, and other relevant laws and regulations to promote reform and development of commercial enterprises and the domestic consumer market, and to facilitate experimentation with the use of foreign investment in the commercial sector.
The Measures sanction the creation of Sino-foreign equity or cooperative joint ventures, but not wholly foreign-owned investments, in the PRC's retail and wholesale markets. They permit the establishment of joint venture commercial outlets in provincial capitals, the capitals of autonomous regions, and special economic zones, as well as in Beijing, Tianjin, Shanghai, Chongqing and municipalities granted provincial status by the State. In addition to retail business, wholesale activities may be conducted by approved joint venture commercial enterprises in any of these geographical areas.
A foreign party to a joint venture commercial enterprise must demonstrate that it possesses financial strength, advanced commercial operations, management expertise, an extensive international sales network, a sound reputation and the ability to promote the export of Chinese products through the joint venture.
In order to apply for the establishment of a retailing joint venture, the foreign party must have: (i) average yearly sales turnover of at least US$2 billion during the three years prior to the date of application, and (ii) assets of more than US$200 million during the year prior to the date of application.
For a wholesaling joint venture, the foreign party must have: (i) average yearly sales turnover of at least US$2.5 billion during the three years prior to the date of application, and (ii) assets of more than US$300 million during the year prior to the date of application.
The Chinese party to a joint venture commercial enterprise must be a qualified distributor demonstrating financial strength and solid operating capacity. In addition, it must satisfy certain conditions as follows:
* It must have assets for the year preceding the date of application of not less than 50 million yuan (30 million yuan if in central or western China).
* If the Chinese party is a commercial enterprise, it must have an average yearly sales turnover of at least 300 million yuan during the three years prior to the date of application (200 million yuan if in central or western China).
* If the Chinese party is a corporation with foreign trade privileges, its average yearly import and export turnover (on its own account) for the three years immediately prior to the date of application must be more than US$50 million. Of this, the export volume must be at least US$30 million.
A joint venture commercial enterprise must observe the following conditions and requirements:
* For retail joint ventures, registered capital must be at least 50 million yuan (30 million yuan in central and Western China).
* For wholesale joint ventures, registered capital must be at least 80 million yuan (60 million yuan in central and Western China).
* For wholesale joint ventures, the Chinese party's investment stake must be at least 51 percent.
* For joint ventures with three or fewer chain stores, including convenience stores, specialty stores, and franchise stores that operate as chain stores, the Chinese party's investment stake must be at least 35 percent.
* In joint ventures with three or more chain stores, the Chinese party's investment stake must be at least 51 percent. However, for joint ventures where the foreign party has procured large quantities of domestic products and is able to expand domestic exports via its international marketing network, the foreign party may be permitted to be the controlling shareholder, subject to State Council approval.
* The joint venture may establish branch stores only in the form of direct chain stores which are directly invested in and operated by the joint venture.
* The operating term shall not be more than 30 years (40 years for those in central or Western China).
* In the case of a trademark, trade name, or technology transfer contract, the fees paid to the foreign party shall not exceed 0.3 percent of the joint venture's annual sales turnover (excluding Value-added Tax).
* A joint venture commercial enterprise may not engage in commodity importing or act as an export agent.
* The total annual amount of imports of a joint venture shall not exceed 30 percent of its commodity sales volume for the same year.
For retail joint ventures, the permitted business scope includes: (i) commercial retailing, (ii) organizing the export of domestically produced products (iii) import and export of commodities on its own account, and (iv) relevant ancillary services.
A joint venture engaged in retail sales may, upon approval, carry out wholesaling as its secondary business. For wholesale joint ventures, the permitted business scope includes: (i) wholesaling of domestically produced and imported commodities on its own account, and (ii) organizing the export of domestically produced products.
In order to obtain approval for the establishment of a joint venture commercial enterprise, the Chinese party must first submit a feasibility study report to the local Economic and Trade Commission which, together with the local bureau of internal trade, submits the report to the central-level State Economic and Trade Commission ("SETC"). SETC may approve the feasibility study report after consulting the Ministry of Foreign Trade and Economic Cooperation ("MOFTEC").
Once the feasibility study report is approved, the local foreign economic and trade department submits the joint venture contract and articles of association, together with other required documents, to MOFTEC for approval. Within one month of MOFTEC approval, the joint venture must register with the local administration of industry and commerce on the basis of its MOFTEC approval certificate.
If an established joint venture commercial enterprise wishes to engage in wholesaling as its secondary business, open branch offices, or transfer an interest in the joint venture, it must apply to MOFTEC, which will make its determination in consultation with SETC.
MOFTEC and SETC or their authorized institutions shall supervise and administer regulation of foreign-invested commercial enterprises in accordance with PRC laws and regulations.
