A wide-open window for online sales

Before the Circular, there were a few hurdles and uncertainties restricting foreign access to online operations in China. For example, foreign operators were generally required to establish at least one physical retail outlet in order to sell their goods online domestically. Secondly, the rules were not clear as to whether an online retailer would require a value-added telecoms licence (VATL) to operate in China. Thirdly, foreign-invested enterprises (FIEs) wanting to sell products over the Internet or via vending machines were subject to the review and approval of the highest approval authority, Mofcom.

2. What's new in the Circular

The new Circular has clarified several issues regarding the approval process for FIEs engaging in e-commerce activities and vending machine sales to some extent.

a) E-commerce activities FIEs can engage in

Under the new Circular, foreign-invested manufacturing and commercial enterprises (FIMCEs), regardless of whether they are newly-established or existing enterprises, can engage in online sales.

In China, foreign-invested commercial enterprises (FICEs) are permitted to engage in commission agency business, retailing, wholesaling and/or franchising (franchising is subject to separate rules) business activities.

The Circular provides that sales through the Internet shall be deemed an extension of an enterprise's sales activities. Accordingly, the FIMCEs will have an automatic right to sell products online without having to obtain further approval from Mofcom or its provincial branch. Specifically, foreign-invested manufacturing enterprises can directly sell self-produced products.

However, it should be noted that in order to establish a new FIE to engage exclusively in online sales, the FIE must be approved as a commercial enterprise by the provincial branch of Mofcom. It appears that such a commercial enterprise is no longer required to establish a retail outlet in order to be approved.

b) Other requirements for E-commerce business

The Circular requires FIMCEs engaging in sales through the Internet to display their business licences and any requisite special permits conspicuously on the main page of their websites or on the page where sales activities are primarily conducted. In addition, they must establish reasonable systems for the return and replacement of products, to keep sales records and to strictly protect the privacy of consumers and trade secrets.

FIMCEs shall not distribute products or commodities online that are prohibited by Chinese laws and regulations. Of course, products or services sold by any FIE over the Internet are subject to the prior approval of or registration with the relevant authority where appropriate. Particularly, if the FIMCEs engage in the distribution of products such as refined oil, crude oil, books, newspapers, magazines, or medicines, they should also provide information regarding the business approval certificate, and display its clear picture or provide electronic links.

MIIT's value-added telecoms licence

1. General overview

The Circular was released by Mofcom, to which the Ministry of Industry and Information Technology (MIIT) is not a joint authority. Telecoms licensing is under the administration of the MIIT, so the enforcement of this Circular shall also be subject to MIIT's views.

According to the PRC Telecommunications Regulations (中华人民共和国电信条例), telecoms services in China shall be subject to a licensing mechanism, under which the telecoms services are catalogued into being either a basic telecoms service or a value-added telecoms service, and each of them has different thresholds. Telecoms service provision is a restricted sector for foreign investment. In accordance with the Administration of Internet Information Services Measures (国务院互联网信息服务管理办法), as for a for-profit internet content provider (ICP), the operator shall secure an ICP license from MIIT, while the operator of a non-profit ICP is only required to register for record with MIIT. Non-profit ICPs refers to ICPs providing publicly shared information at no charge.

There are no clear guidelines distinguishing between a for-profit ICP and a non-profit ICP from MIIT. Local communication authorities have different perspectives on this issue. Some local communication administrations have a broader view of what constitutes a non-profit ICP. For example, in terms of an e-commerce website, if the website owner just provides sales information or sells its own manufactured products through the website, it shall be deemed a non-profit website and is required to only register its website for record. At the same time, other communication administrations remain fastidious to the view that all e-commerce websites must apply for ICP licences. After the Circular released by Mofcom, it appears that local communication administrations are unifying their understanding on the criteria for distinguishing for-profit ICPs and non-profit ICPs, and will honour the Circular.

2) VATL under the Circular

According to the Circular, if an FIMCE provides an online platform to other traders through which other parties can transact with each other (for example, the ebay or Alibaba model), a VATL is necessary from the MIIT. However, if such FIMCE provides an online platform only for its own use to engage in the direct sales of products, no VATLs would be required and the FIMCE would only need to file relevant information for record with the local MIIT. This suggests that third party sites such as ebay and Alibaba are categorised as for-profit ICP.

The Circular focuses on sales through the Internet and vending machines only. It had made no reference with regard to sales through other channels such as mobile phone networks and television sales. The Circular has not made clear what constitutes an FIMCE's “own network platform.” The MIIT has indicated on an informal occasion that the Circular is not intended to apply to mobile networks. These questions remain to be further clarified in the future.

Foreign investment in value-added telecoms operators in China is still restricted to a 50% share in a joint venture with a Chinese partner and such value-added telecoms licences are particularly difficult to secure.

Vending machine sales

The Circular clearly allows FIEs to operate vending machines in China. Established FIEs that want to expand into the vending machine business, or newly-established enterprises wishing to engage in the vending machine business, must attain approval as a commercial enterprise by the respective provincial Mofcom department. The provincial-level foreign investment department must then seek views of the provincial authority in charge of internal trade at the same level, and conduct a strict examination during its review of an application in accordance with relevant laws and regulations for foreign investment in commerce, as well as food and drug supervision.

In the case of conducting sales through vending machines, the seller must clearly mark on the vending machine the name or title, address and telephone number of the seller and the procedures for lodging complaints. In addition, the seller shall establish the distribution of data to automatically keep a record of previous sales.

Conclusion

An FIMCE can directly engage in online sales without obtaining a separate approval from Mofcom or its local branches. If an FIMCE provides an online platform only for its own use to engage in the direct sales of products, no value-added telecoms services operating permit would be required and the FIMCE merely needs to register with the relevant local MIIT.

It should be noted that since there have been no authoritative guidelines clearly distinguishing between non-profit and for-profit ICPs from the MIIT, different areas may still have different practices. This ambiguity may lead to uncertainty for some FIEs.

The Circular makes it easier for foreign investors to access the China market by shortening administrative approval timelines for those seeking business through online sales.

Jihong Chen and Bing Cheng, Zhong Lun Law Firm, Beijing