This is the second post about Retail in China in collaboration with Angela López Molina, corporate lawyer at DS AVOCATS in Shanghai. If you have not read our previous article entitled “Retail in China (I): Choosing your Business Model (Distributor/ Agent/ Franchise)” you can read it here.
This new post will lay down some facts and tips to help you assess what business structure works best for you in China, completing our previous post with information about corners, shops and internet retail.
This is an individually tailored mini-shop whereby the company rents a small space in a mall. The rent has often a fixed element (based on the number of sq. m. occupied) and a variable part (that is a percentage of the sales made).
a)Laws and Regulations
- You don’t need to establish a company in China to start your business through a corner – you may do it through a local agent.
- Your agent needs to have the so-called “Tax Payer General Status” (1).
- The term of these contracts is usually from 6 months to 1 year.
- Renewal is subject to sales targets being met.
It is a small investment; it allows making the products known, understanding the potential client profile and checking consumers’ reaction.
-Tip #1 You should be aware that many malls impose restrictive conditions in terms of the brand (e.g.it must be a reputable international brand).
-Tip #2 The tenant must ensure a minimum profit in the first months.
-Tip #3. Often the contract (which is usually short term) may be terminated unilaterally by the landlord.
4. SHOP LEASE
This could probably be, from a financial perspective, your riskier option. The main advantage, though, is the full control you have on your operation.
a) Laws & Regulations
- Shop equals Branch: So, for every shop that you open, you need to register a branch (it takes 1-2 months if branches are on the same city and 3 months when it is in a new city)
- Contract Length: 3-5 years
- Not subject to specific sales targets being achieved. You pay a rent and a deposit
c) Tips on how to negotiate a shop lease
-Tip #1 Understand who is renting the space to you (i.e. the owner or a lessee) – you might be renting the space from a person who is not actually the landlord (but, for example, a tenant who is trying to sub-lease the premises). In such case, if the tenant does not manage to renew the contract with the landlord, you may be forced to leave the shop, after having invested in decoration, marketing, etc. You should therefore always ask the supposed landlord for his/her certificate of ownership of the premises.
-Tip #2. Understand what is the legal use of such premises (e.g. residential, commercial, etc.). In the certificate of ownership, you will be able to check what is the use of such premises. Please note that if the premises do not have a commercial use and, for example, they have a residential use instead, you are not supposed to locate a shop in such place- the authorities would deny the registration of this shop as a branch or as the registered office of a company. Furthermore, if you have an inspection, you will be exposed to sanctions.
-Tip #3. Try to negotiate renewal conditions in the initial lease contract (e.g. a maximum percentage rise per year) so that you don’t see a big hike in rental cost when the renewal time arrives
- Tip #4.If your shop will be in a mall that is currently under construction, we advise you to sign a letter of intention first and to negotiate the lease once the mall has the required licene.
5. INTERNET SALES
a) Recent history
Joint Ventures and WFOEs have been allowed (theoretically) to engage in retail activity through the internet since 2004. The reality has been quite different though. Central MOFCOM had to approve these activities and approvals have either been put on hold or suspended.
Foreign companies used to navigate this difficulty in two ways:
- Avoiding setting up in China: but there are a number of hassles (logistics, currency exchange …)
- Partnering with a local broker
b) Update on Law & Regulations
This type of retail activity has now seen some encouraging signs. MOFCOM issued on 19 August 2010 the ”Circular on Several Issues Concerning the Approval and Administration of Foreign Investment in Sales via the Internet and Automatic Vending Machines”. The main changes that this circular represents are:
1. For established FIEs:
Internet sales are regarded as an extension of an FIE’s regular sales activities and can be conducted without any need to obtain additional approvals.
2. For Companies trading only through the internet:
Applications for the establishment of an FIE specialising in Internet sales are to be submitted for approval to the appropriate provincial-level agency under MOFCOM instead of central MOFCOM, which has two positive implications:
i) speeds up the approval process, and
ii) promotes competition among regional administrations to capture foreign investment.
3. Some requirements on-line businesses should meet:
i) Display its business license in a prominent position on its website home page or on the website where it conducts sales activities.
ii) Establish a comprehensive system for the return or replacement of goods.
iii) Strictly protect consumers’ personal privacy.
iv) Abide by China’s consumer laws and regulations.
Would you like to share your retail experiences?
(1) Small scale taxpayer – ordinary taxpayer
When can a company apply for qualification of VAT ordinary taxpayer?
A trading company (wholesale or retail) after its setting-up, having achieved an annual turnover of no less than RMB 800,000.
According to a circular promulgated by the State Administration of Taxation, effective as of 20 March 2010, a trading company having not obtained an annual turnover of 800 000RMB may also apply for the qualification of ordinary taxpayer if it cumulatively satisfies the two following conditions:
a) It has a fixed place of operation.
b) It can establish accounting books in accordance with the Chinese regulations on accounting, and possesses legal and valid accounting vouchers, and can present exact accounting tax documents.
Update: This series has now been completed. All the links shown bellow.
* Retail in China(I): Choosing your Business Model (Distributor, Agent, Franchise)
* Retail in China (II): Choosing your Business Model (Corner, Shop Lease, Internet)
* Retail in China (III): 10 Expert Tips to Help a Succesful Set Up