KnowChina

Meeting your regulatory responsibilities

CHOOSING YOUR LEGAL STRUCTURE…

TRADING FROM YOUR EXISTING LEGAL ENTITY AT HOME…

This means of indirect market entry into China can take a number of forms which arguably require fewer resources but only provide limited market access. Before exporting your goods into China you will need to consider which category of goods your product falls into, i.e. whether they are considered a free, restricted or prohibited import and then apply to the Chinese Ministry of Commerce (MOFCOM) for the relevant import licence to avoid your goods being confiscated. You will also need to be familiar with Chinese goods standards, labelling and packaging requirements, obtain a ‘China Compulsory Certification’ (CCC) mark, be aware of customs inspection procedures and pay the relevant taxes and fees – please see our logistics page for more detail.

Alternatively, rather than exporting directly to your consumer, there are various methods of indirect exporting through the use of an intermediary; an agent, distributor, representative office, licensor based in China or by engaging an export trading management company at home. Adopting this approach can alleviate some of the administrative requirements mentioned above by delegating these to your intermediary on the ground in China. A further option is to approach a licensing or franchising model, which can provide instant market access but runs the risk of intellectual property infringements which is particularly acute when considering entering the Chinese market.

SETTING UP A LEGAL ENTITY IN THE CHINA…..

Setting up a new legal entity in China provides a means of direct market entry giving full market access but will require greater resources and time. Moreover, establishing a foreign-invested enterprise (FIE) in China naturally means you will be subject to all laws, regulations and taxes as laid forth by the Chinese government. China offers a number of corporate forms to choose from including; joint-stock and limited liability companies, partnership firms or sole proprietorships. A set of prescribed administrative rules apply including the need to acquire a foreign business license from MOFCOM or an ID card of power of attorney, the relevant authorities will consider the company’s proposed articles of association and a feasibility study before approving the application. Different forms of entity are subject to a number of different restrictions and regulations depending on which category of industry the business falls into; permitted, restricted or prohibited sector. This in turn can also impact whether you enter the market as a wholly foreign-owned enterprise (WFOE), a foreign-invested partnership (FIP) or via a joint venture model. Stricter regulations apply when establishing a WFOE but it does offer exclusive management control. By contrast joint ventures are often the only type of company that allow foreign investors to engage in restricted industries in China, where this is the case it is also likely that the Chinese Party is required to have majority control.

SELLING ONLINE…..

Deciding how you sell online into China will have implications on the legal framework applicable. If you’re selling via a standalone website it is recommended to obtain an ICP licence to avoid your website being blocked. A standalone website based in China will require that you have a registered legal entity in China in order to obtain the appropriate licence. Alternatively, you could choose to sell via a third-party platform; each platform will have its own specific requirements but it should be noted that some China based platforms require sellers to have their own company registered in China.

HONG KONG AS A GATEWAY?

As a former British colony, Hong Kong historically provided a gateway to trade in mainland China, but since being returned to China it is now considered a Special Administrative Region with a largely distinct legal system from mainland China. It has arguably maintained its more accommodating common law regime, offering a favoured legal and economic structure and establishing a reputation as one of most liberal market-based economies in the world. Establishing a legal entity in Hong Kong is far quicker than in mainland China and can also offer certain tax benefits. Further benefit can be found in CEPA, the bilateral free trade agreement between mainland China and Hong Kong, although some restrictions do apply in order to be eligible.

CAUTION: By exporting goods to Hong Kong you run the risk of unknowingly selling to individuals who work on the black market. Appropriate due diligence measures should therefore be taken to ensure you are not implicated in any illegal trading activities!


CHINESE TAX SUMMARY

Tax Rate Notes
Corporation Tax 25% The corporate profits tax rate is 25% for all companies, effective from 1st January 2008.
Capital Gains Tax – For Companies 25% In general, capital gains are treated in the same manner as other taxable income and are taxed at the normal tax rate of 25%.
Withholding Tax – Dividends 10% There is a 10% withholding tax rate on dividends.
Withholding Tax – Other Interest 10% This tax applies to payments to non-residents and non-corporate residents.
Value Added Tax 0-17% The standard rate of VAT in China is 17%, which is charged on goods sold and services rendered. There are additionally reduced rates of 0%-13% which are charged on various specified products and services. For example, postal services are charged at a VAT rate of 11%, and agricultural products at 13%. Delivery services for the exportation of goods are exempt from VAT altogether.
Social Tax on Employee’s Salaries 32.8% Employer All monthly payments to an employee of up to $2,800 are charged at 32.8% on the employer. This covers a wide range of social benefits, including pensions, medical and unemployment insurance and maternity.
Currency Exchange Control – Cash $5,000 or ¥20,00 Individuals are permitted to carry a maximum of $5,000 or CNBY 20,000 in cash into and out of China.
Currency Exchange Control – Bank Transfer Various The Chinese currency control system distinguishes between transactions under the current account and the capital account, and requires foreign investors to open separate bank accounts for both. Current account foreign currency transactions include the import and export of goods and services, earnings from interest or dividends from portfolio securities and regular transfers. Capital account transactions are mainly related to the purchase and sale of fixed assets and foreign direct investment. In general, capital account transactions need approval from the State Administration of Foreign Exchange (SAFE), whereas current account transactions can be made directly through the bank. As of June 1, capital account transactions will not need SAFE approval either.

KEY LEGISLATION

THE SNAPSHOT PROVIDED HERE IS NOT AN EXHAUSTIVE GUIDE, THE CHINESE LEGAL FRAMEWORK IS VERY COMPLEX AND CAN VARY DRAMATICALLY ACROSS ITS GEOGRAPHICAL REGIONS AND ACROSS INDUSTRIAL SECTORS, CONSULTING A LEGAL EXPERT IS THEREFORE ESSENTIAL TO ENSURE YOU MEET YOUR REGULATORY RESPONSIBILITIES!

Privacy and Data

The regulatory framework governing the use of personal information in China, is very complex due the piecemeal fashion in which it has developed. The result is a host of sector-specific regulators and over 200 local and provincial data privacy laws. The most relevant for our purposes are the MIIT Regulations introduced to encourage consumer engagement in the e-commerce market. Organisations processing personal data must inform individuals of the purpose, method and scope of the data collection, must obtain consent and implement measures to protect against unlawful disclosure. Further provision is provided relating specifically to ‘internet information services’ requiring an ICP licence to engage in particular online activities, the service provider must keep personal information of users confidential and are prohibited from selling, distorting or illegally using such information. No specific regulation regarding the use of Cookies exist but this arguably falls under remit of MIIT Regulations and so require consent.

Advertising

Following the NPC Decision and the Consumer Rights Law no organisation or individual is permitted to send commercial information to consumers unless the consumer requests it, or consents to receiving the information. The sender must also give a clear indication of the word ‘advertisement’ or ‘AD’ at the beginning of e-mail title when sending e-mails containing commercial advertisement content.

TodayIntellectual Property

China are a member of the WTO and so their IPR laws are largely in line with minimum standards across the globe. However, companies are strongly advised to ensure their IPR is registered not only in their home country but also in China before entering the market. China operates a ‘first-to-file’ system for trademarks, so you risk losing protection if a similar mark has already been registered.

World Consumer Rights Day – March 15th

With an ever-increasing focus on consumer protection, March 15th marks the day where illegal business practices of foreign and domestic companies are publicly aired and condemned in China – seek expert advice on compliance to avoid being named and shamed!

*APPICABLE LEGISLATION: Standards for Online Transaction Platform Services 2005, OTS Standards, Consumer Rights Protection law of the People’s Republic of China, Law of the People’s Republic of China on Product Quality, The Administrative Measures Regarding Internet E-mail Services 2006

Consumer Protection

OTPS Standards provide an industrial code of practice for e-commerce in China. Key obligations include the need to comply with Chinese contract law, to adopt measures to maintain the operation of your platform and supervise the information released through it, and to take measures to ensure the safety of transactions.

The OTS Standards implement further regulations requiring traders to provide online payment settlement services via state approved financial institutions/business entities, and to have systems in place to handle complaints and disclose business licence information.

Further laws additionally require that traders must take back goods returned within 7 days for a full refund. No reason for the return need be provided.

Numerous regulations also exist surrounding:

  • The control of product quality to ensure the safety of users;
  • The necessity of conforming to standards indicated by a product or sample; and
  • The need for any marks/labels to be authentic and fulfil associated requirements.

Other areas of interest

Reaching and engaging your consumers

Chinese consumers are unique in their shopping habits and preferences; e-shopping in China is viewed as a form of entertainment for the entire family.

Receiving payment from your customers

Cash on delivery is still regarded as a must-have option when selling to Chinese consumers.

Getting The Goods to Your Customers

E-retailers will encounter hurdles such as China’s relatively under-developed delivery infrastructure.

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