Administration of Foreign Investment in the Commercial Sector Procedures

(Promulgated by the Ministry of Commerce on April 16 2004 and effective as of June 1 2004.)

Article 1: These Procedures have been formulated pursuant to such laws and administrative regulations as the PRC Sino-foreign Equity Joint Venture Law, the PRC Sino-foreign Cooperative Joint Venture Law, the PRC Wholly Foreign-owned Enterprise Law, the Company Law, etc. in order to open up more sectors to foreign investment and improve the development of the market distribution system.

Article 2: Foreign companies, enterprises, other economic organizations and individuals (hereafter, Foreign Investors) that establish foreign-invested commercial enterprises in China to engage in business activities shall abide by these Procedures.

Article 3: For the purposes of these Procedures, the term "foreign-invested commercial enterprises" means foreign-invested enterprises that engage in the following business activities:

(1) commission agency: the activity whereby for a fee the sales agent, broker or auctioneer of goods or another wholesaler sells the goods of a third party and provides related ancillary services on the basis of a contract;

(2) wholesale: the activity of selling goods to retailers, to industrial, commercial, institutional and other such customers or to other wholesalers, and providing related ancillary services;

(3) retail: the activity of selling, from a fixed location or by way of television, telephone, mail order, the internet or vending machines, goods for consumption and use by individuals or groups, and providing related ancillary services; and

(4) franchising: the activity of granting third parties the right to use one's trademark(s), trade name, business model, etc. through the execution of contracts in order to obtain remuneration or franchising fees.

Foreign companies, enterprises, other economic organizations and individuals must engage in the business activities specified in items (1), (2), (3) and (4) of the preceding paragraph by way of foreign-invested enterprises established in China.

Article 4: Foreign-invested commercial enterprises shall abide by the laws, administrative regulations and related rules of the People's Republic of China, and their legitimate business activities, rights and interests shall be protected by Chinese law.

Article 5: The competent commercial department of the state shall supervise and administer foreign investment in the commercial sector and the business activities of foreign-invested commercial enterprises in accordance with the law.

Article 6: Foreign investors in foreign-invested commercial enterprises shall have a good reputation and shall not have violated Chinese laws, administrative regulations or related rules. Foreign investors that are relatively strong economically and have advanced commercial business and management expertise, advanced marketing skills and extensive international sales networks are encouraged to establish foreign-invested commercial enterprises.

Article 7: Foreign-invested commercial enterprises shall satisfy the following conditions:

(1) having minimum registered capital complying with the relevant provisions of the Company Law;

(2) complying with relevant provisions on the registered capital and total amount of investment of foreign-invested enterprises; and

(3) having a term of operation that, in general, does not exceed 30 years or, if established in central or western China, a term that in general does not exceed 40 years.

Article 8: To open a store a foreign-invested commercial enterprise shall satisfy the following conditions:

(1) if it applies to open a store at the same time it applies to establish a commercial enterprise, it shall comply with relevant provisions on urban development and urban commercial development;

(2) if a foreign-invested commercial enterprise whose establishment has already been approved applies to open a store, it shall satisfy the conditions set forth below in addition to complying with the requirement in Item (1):

(a) it participated on time in the joint annual inspection of foreign-invested enterprises and passed the inspection; and

(b) its registered capital has been paid in full.

Article 9: Subject to approval, foreign-invested commercial enterprises may engage in the following businesses:

(1) Foreign-invested commercial enterprises engaging in retail business:

(a) merchandise retailing;

(b) import of merchandise for its own account;

(c) procurement of products in China for export; and

(d) other related ancillary business.

(2) Foreign-invested commercial enterprises engaging in wholesale business:

(a) merchandise wholesaling;

(b) commission agency (with the exception of auctioneering);

(c) merchandise import and export; and

(d) other related ancillary business.

Foreign-invested commercial enterprises may authorize third parties to open stores under a franchising arrangement.

Subject to approval, a foreign-invested commercial enterprise may engage in any one or more of the foregoing types of sales business. The types of merchandise it deals in shall be specified in the provisions of its contract and articles of association concerning its scope of business.

Article 10: The establishment of a foreign-invested commercial enterprise and its opening of a store shall be carried out in accordance with the following procedure:

(1) The foreign-invested commercial enterprise's project proposal, feasibility study and establishment shall be submitted and approved together.

(2) Unless otherwise specified in Item (3) or (4) of the first paragraph hereof, the investor(s) intending to establish a foreign-invested commercial enterprise or the established foreign-invested commercial enterprise applying to open a store shall submit the application documents respectively specified in Articles 12 and 13 to the competent provincial-level commerce department of the place of registration of the foreign-invested commercial enterprise. After conducting a preliminary examination of the submitted documents, the competent provincial-level commerce department shall, within one month of the date of receiving all of the application documents, forward the same to the Ministry of Commerce. The Ministry of Commerce shall render its decision on whether or not to grant its approval within three months of the date of receiving all of the application documents. If it approves the application, it shall issue the applicant a Foreign-Invested Enterprise Approval Certificate and if it does not grant its approval, it shall specify the reasons therefor.

The Ministry of Commerce may, in accordance with these Procedures, authorize the competent provincial-level commerce authorities to examine and approve the aforementioned applications.

(3) If a foreign-invested commercial enterprise that engages in retail business, that complies with the conditions set forth below and whose scope of business does not involve sale by television, telephone, mail order, internet or vending machines or the sale of any of the merchandise specified in Articles 17 and 18 hereof intends to open a store within the same provincial-level administrative jurisdiction as the place where it is located, its application shall be subject to the examination and approval of the competent commerce authority at such provincial level, to the extent of the department's examination and approval authority, and the said authority's decision shall be reported to the Ministry of Commerce for the record.

(a) The business area of any one store does not exceed 3,000 square metres, the number of stores does not exceed three and the total number of similar stores opened in China by the Foreign Investor by way of (an) established foreign-invested commercial enterprise(s) does not exceed 30.

(b) The business area of any one store does not exceed 300 square metres, the number of stores does not exceed 30 and the total number of similar stores opened in China by the Foreign Investor by way of (an) established foreign-invested commercial enterprise(s) does not exceed 300.

(4) The establishment and store opening applications of a foreign-invested commercial enterprise that is a Sino-foreign equity or cooperative joint venture whose trademark(s) and trade name are owned by a domestically-invested enterprise or a Chinese natural person, whose Chinese investor holds a controlling interest in it and whose scope of business does not involve dealing in merchandise specified in Articles 17 and 18 hereof shall be subject to the examination and approval of the competent provincial-level commerce department of the place where it is located, to the extent of the department's examination and approval authority. If a store is to be opened in another province, the opinion of the competent provincial-level commerce department of the place where the store is to be opened shall be sought as well.

Without the authorization of the Ministry of Commerce, competent provincial-level commerce authorities may not delegate the examination and approval authority for Items (3) and (4) of the first paragraph hereof to a lower level authority.

Article 11: The investors shall carry out registration procedures with the administration for industry and commerce on the strength of the Foreign-Invested Enterprise Approval Certificate within one month of the date of receipt of such approval certificate.

Article 12: To apply for the establishment of a foreign-invested commercial enterprise, the following documents shall be submitted:

(1) an application form;

(2) a feasibility study jointly signed by all the investors;

(3) the contract, articles of association (wholly foreign-owned enterprises need only submit their articles of association) and the annexes thereto;

(4) each investor's bank certification of creditworthiness, registration certificate (photocopy) and document (photocopy) identifying its legal representative as such; if the Foreign Investor is an individual, he shall submit proof of his identity;

(5) each investor's audit report for the most recent year, audited by an accounting firm;

(6) the appraisal report for the state-owned assets to be injected into the Sino-foreign equity or cooperative joint venture by the Chinese investor thereof;

(7) the list of import and export merchandise of the proposed foreign-invested commercial enterprise;

(8) the list of the members of the board of directors of the proposed foreign-invested commercial enterprise and the instruments of appointment of the directors appointed by each party;

(9) the enterprise name pre-approval notice issued by the administration for industry and commerce;

(10) documentation (photocopy) evidencing the use rights pertaining to the land on which the proposed store is to be opened and/or the premises lease agreement (photocopy), except for stores with a business area of 3,000 square metres or less; and

(11) the explanatory document issued by the competent commerce authority of the government of the place where the proposed store is to be opened, specifying that it conforms with urban development and urban commercial development requirements.

Where any document is executed by a person other than the legal representative, the power of attorney issued by the legal representative shall be presented.

Article 13: An established foreign-invested commercial enterprise applying to open a store shall submit the following documents:

(1) an application;

(2) if revision of the contract and articles of association is involved, the revised contract and articles of association;

(3) a feasibility study for the opening of the store;

(4) the board resolution concerning the opening of the store;

(5) the enterprise's audit report for the most recent year;

(6) the enterprise's capital verification report (photocopy);

(7) each investor's registration certificate (photocopy) and document (photocopy) identifying its legal representative as such;

(8) documentation (photocopy) evidencing the use rights pertaining to the land on which the proposed store is to be opened and/or the premises lease agreement (photocopy), except for stores with a business area of 3,000 square metres or less; and

(9) the explanatory document issued by the government of the place where the proposed store is to be opened, specifying that it conforms with urban development and urban commercial development requirements.

Where any document is executed by a person other than the legal representative, the power of attorney issued by the legal representative shall be presented.

Article 14: Such legal documents as the trademark and trade name licensing contracts, technology transfer contract, management contract, service contract, etc. executed by the foreign-invested commercial enterprise shall be annexed to the contract and submitted together therewith (in the case of wholly foreign-owned commercial enterprises, they shall be annexed to the articles of association).

Article 15: The land for the store proposed to be opened by a foreign-invested commercial enterprise shall be commercial land obtained through an open invitation for bids, auction, listing on a land exchange, etc. in accordance with relevant state laws and administrative regulations on the administration of land.

Article 16: If a foreign-invested commercial enterprise is to deal in merchandise for which the state has special regulations and/or in import or export merchandise subject to quotas or licensing, it shall carry out procedures in accordance with relevant state provisions.

Article 17: If a foreign-invested commercial enterprise is to deal in any of the following merchandise, it shall, in addition to complying with these Procedures, comply with the following provisions:

If the foreign-invested commercial enterprise is to deal in books, newspapers and/or periodicals, it shall comply with the Administration of Foreign-invested Books, Newspapers and Periodicals Distribution Enterprises Procedures.

If the foreign-invested commercial enterprise is to operate one or more petrol stations engaging in the retailing of processed oil, it shall have stable processed oil supply channels, comply with the local petrol station development plan and have operating facilities that comply with current state standards and measurement calibration rules and meet fire safety, environmental protection and other such requirements. The specific implementing procedures will be formulated separately by the Ministry of Commerce.

If the foreign-invested commercial enterprise is to deal in pharmaceutical products, it shall comply with relevant state standards on the administration of pharmaceutical sales. The specific implementing procedures will be formulated separately by the Ministry of Commerce.

If the foreign-invested commercial enterprise is to deal in motor vehicles, it shall do so within its approved scope of business. The specific implementing procedures will be formulated separately by the Ministry of Commerce.

Unless otherwise specified in Article 18 hereof or this article, foreign-invested commercial enterprises established to deal in agricultural by-products and/or means of agricultural production shall not be subject to restrictions on territory, equity ratio or investment amount.

Foreign-invested commercial enterprises engaging in wholesaling may not deal in pharmaceutical products, pesticides or mulching films before December 11 2004 and may not deal in chemical fertilizers, processed oil or crude oil before December 11 2006.

Foreign-invested commercial enterprises engaging in retailing may not deal in pharmaceutical products, pesticides, mulching films or processed oil before December 11 2004 and may not deal in chemical fertilizers before December 11 2006.

Foreign-invested commercial enterprises engaging in wholesaling may not deal in salt or tobacco and foreign-invested commercial enterprises engaging in retailing may not deal in tobacco.

Article 18: If a Foreign Investor has opened an aggregate of 30 stores or more in China, the merchandise in which they deal includes books, newspapers, magazines, motor vehicles (this limitation will be lifted on December 11 2006), pharmaceutical products, pesticides, mulching films, chemical fertilizers, processed oil, grains, vegetable oil, sugar, cotton, etc. of different brands from multiple suppliers, the capital contribution of the Foreign Investor may not exceed 49%.

Article 19: If a foreign-invested commercial enterprise is to authorize third parties to open stores under a franchising arrangement, it shall, in addition to complying with these Procedures, comply with state provisions on franchising activities, if there are such regulations.

Article 20: If a foreign-invested commercial enterprise is to engage in auction business, it shall comply with such relevant laws as the Auction Law, the Cultural Relics Law, etc. and be subject to the examination and approval of the Ministry of Commerce. The specific implementing procedures will be formulated separately.

Article 21: The establishment of wholly foreign-owned commercial enterprises will be permitted from December 11 2004.

Article 22: Prior to December 11 2004, the establishment of foreign-invested commercial enterprises engaging in retailing and their stores will be geographically restricted to provincial capitals, capitals of autonomous regions, municipalities directly under the central government, cities with independent development plans and special economic zones. The geographic restriction will be lifted on December 11 2004.

The geographic restriction on foreign-invested commercial enterprises engaging in wholesaling will be lifted on the date of implementation hereof.

Article 23: The investment in the commercial sector in China by foreign-invested enterprises shall comply with the Investment within China by Foreign Investment Enterprises Tentative Provisions and shall be handled with reference to these Procedures.

Article 24: Foreign-invested enterprises other than foreign-invested commercial enterprises that wish to engage in the business activities specified in Article 3 hereof shall comply with these Procedures and amend their scope of business accordingly in accordance with the law.

Article 25: The investment in, and establishment of, commercial enterprises by investors from the Hong Kong Special Administrative Region, the Macao Special Administrative Region and Taiwan in other Chinese provinces, autonomous regions and municipalities directly under the central government shall be handled with reference to these Procedures in addition to the following provisions:

(1) Hong Kong and Macao commercial service suppliers may establish wholly foreign-owned commercial enterprises on the Mainland from January 1 2004;

(2) the territory in which Hong Kong and Macao commercial service suppliers may establish retail enterprises on the Mainland is extended to cover prefectural-level cities, and in Guangdong province, to county-level cities;

(3) from January 1 2004, Hong Kong and Macao commercial service suppliers may, pursuant to the relevant provisions hereof, apply to establish on the Mainland commercial enterprises engaging in the retailing of motor vehicles, provided that such suppliers' average annual turnover in the three years prior to their applications was not less than US$100 million; the value of their assets in the year prior to their applications was not less than US$10 million; and the registered capital of their motor vehicle retailers to be established on the Mainland is not less than Rmb10 million or, if to be established in central or western China, not less than Rmb6 million;

(4) Chinese citizens with permanent residency in Hong Kong or Macao are permitted to establish on the Mainland sole proprietorships engaging in commercial retail activities (with the exception of franchising) in accordance with relevant laws, regulations and rules, provided that their business area does not exceed 300 square metres;

(5) the Hong Kong and Macao commercial service suppliers specified in this Article shall comply with the definition of "service supplier" in, and the requirements of relevant provisions of, the Mainland and Hong Kong Closer Economic Partnership Arrangement and the Mainland and Macao Closer Economic Partnership Arrangement respectively.

Article 26: Foreign-invested commercial enterprises are encouraged to join relevant trade associations and strengthen corporate discipline.

Article 27: The Ministry of Commerce is in charge of interpreting these Procedures.

Article 28: These Procedures shall be implemented from June 1 2004.

Article 29: The Pilot Projects for Commercial Enterprises with Foreign Investment Procedures jointly issued by the former State Economic and Trade Commission and Ministry of Foreign Trade and Economic Cooperation are repealed from the date of implementation hereof.

1. Translation provided by Baker & McKenzie.