Tapping into China’s Online Sales Market

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By Yao Lu

Feb. 7 – China’s online sales market has become too big for international businesses to ignore. The country’s online shopping industry surpassed Japan’s in 2012 and is expected to overtake that of the United States to become the world’s largest online retail market in 2013.

In 2012, China’s online shoppers reached 247 million, up 21.7 percent from the 203 million recorded a year earlier. This figure is expected to reach 310 million by the end of 2013. Moreover, the value of transactions in the country’s online retail market grew by 64.7 percent in 2012 to RMB1.32 trillion, taking up 6.3 percent of the total sales of China’s social consumption of retail goods.

Given the growing importance and huge potential of the country’s online retail industry, foreign investors are keen to tap into this lucrative market. Fortunately, most of the previous legal restrictions on foreign investment in the online retail sector have been lifted as part of the country’s WTO commitment to realize an “open market.”

Legal Framework

Allowing foreign investment in the online retail business

With the introduction of the “Measures for Administration of Foreign Investment in the Commercial Sector” in 2004, foreign investors have been allowed to engage in China’s online retail business though a foreign-invested commercial enterprise (FICE). A FICE can be in the form of either a wholly foreign-owned enterprise (WFOE) or a joint venture (JV), and a single-shareholder company is subject to a minimum registered capital requirement of RMB30,000 as prescribed by China’s Company Law. However, in practice, as the registered capital must reflect the needs of the business, it is usually far higher than the minimum requirement.

Easing of regulations imposed on foreign investment

In August 2010, China’s Ministry of Commerce (MOC) issued the “Circular on Several Issues Concerning the Approval and Administration of Foreign Investment in Sales via the Internet and Automatic Vending Machines (hereinafter referred to as ‘Circular’),” which further clarifies that online sales act as an extension of an enterprise’s sales activities. Therefore established foreign-invested manufacturing enterprises and FICE can directly undertake online sales in China without approval from the MOC.

Furthermore, the Circular relegated the approval decision for establishment of an FIE that exclusively engages in online sales down from the central commerce department to the various provincial commerce departments. This, in turn, has resulted in the speeding up of the approval process, and has effectively increased competition among regional administrations to capture foreign investment.

An FIE that intends to provide network services to other trading parties with its own online platform needs to apply with the Ministry of Industry and Information Technology (MIIT) for a value-added telecommunication service permit (VATS Permit), while enterprises that directly engage in commodity sales through their own online platform need to report to the Telecommunication Administration for record-filing.

Therefore, foreign investors may engage in online sales without a VATS Permit from the MIIT, provided that their online platform is not open to third-party vendors.

Participating in the value-added telecommunication business

The Circular specifies that if a FICE allows third-party vendors to use its online platform, it must hold a VATS Permit from the MIIT. In China, telecommunication services are divided into basic telecommunication services and value-added telecommunication services, and the internet service falls under the latter.

According to the “Provisions on the Administration of Foreign-Invested Telecommunication Enterprises,” an FIE must satisfy the following conditions in order to engage in the value-added telecommunication business in China:

    • The FIE must be a joint venture with foreign investment capped at 50 percent
    • The primary foreign investor of the FIE shall have a good track record of, and operational experience in, operating value-added telecommunication services
    • FIEs that provide value-added telecommunication services nationwide or across provinces are required to have a minimum registered capital of RMB10 million, whereas enterprises engaged in such business within only one province need a registered capital of only RMB1 million
    • The FIE must meet other requirements stipulated by Telecommunication Regulations of China and relevant laws and administrative regulations

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.

For further details or to contact the firm, please email china@dezshira.com, visit www.dezshira.com, or download the company brochure.

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