China: Legal aspects and best practices for retailers in China

Last Updated: 7 June 2018
Article by Maarten Roos, Robin Tabbers and Simon Robertson

China has become the world's leading consumer market and is predicted to grow faster than the West – at 6% annually over the next decade (World Economic Forum). International brands are taking advantage of this, despite increased competition from local competitors and from each other. While e-commerce is now a firm part of the landscape, most international companies remain convinced of the importance of developing a network of brick-and-mortar stores. In this article, we summarize some of the key legal challenges specific to international businesses that plan to open retail stores in China.

Corporate structuring: company set-up

The first step to establishing stores is to incorporate a legal entity. Rules for establishing entities have been liberalized over the years, but it may still take four to six months for a subsidiary to become fully operational. Key issues to decide upon when establishing a retail business are:

  • The registered address is the location where the company is legally registered and determines in which district (and under the supervision of which authorities) the company is incorporated. For larger companies, local governments may be able to offer subsidies and tax benefits; smaller retailers may be offered a virtual address. The office lease must be signed before the company can be formally established.
  • The business scope determines the activities that the company may engage in and must be approved by the competent authorities. Certain types of products (e.g. food, medical products) may be subject to special licensing. Also, some districts will not allow the inclusion of "retail" in the business scope until an office has been leased for the first branch; this requires a two-step process of establishing the company first, and then expanding its business scope to include retail.
  • The company name will be in Chinese and should consist of a location indicator, an industry indicator, and the trade name. For retailers in particular, a good Chinese trade name (and its registration as a trademark) is crucial. Different levels of location (Shanghai vs. China) and different industry indicators may require different levels of approval.
  • The registered capital is the amount of capital that the (foreign) investor commits to the company. There is no legal minimum, but companies should consider actual operational needs, since increasing the registered capital later will take three to six weeks. There is no immediate deadline to contribute the registered capital in full, and so some investors prefer to set a higher registered capital. Others prefer to finance partially through foreign debt, which is subject to strict rules.
  • The Chinese entity will need to have a board of directors or executive director, a legal representative, one or more supervisors, and rules on the authority of these positions and the shareholder. These issues of corporate governance are a major part of the company's Articles of Association, which is a legal document and should be drafted with care.

Branch establishment

While technically the first branch can be opened at the location of the company, it is much more common to keep the company's address as an office and establish the first store at a retail location elsewhere. Subsequent stores will normally require the registration of separate branches.

The most common model is to have one company with many branches across the country – there is no limit to the number of branches that a single company can have. An alternative is to establish separate companies in major cities / regions (e.g. Shanghai, Beijing, Guangzhou / Shenzhen, Chengdu / Chongqing) and structure local branches under each of these companies. In that case, an extra option would be to set up a China Holding Company to consolidate all this business.

When establishing a branch and to ensure that it is ready in time, your legal team must coordinate closely with the builder in charge of construction and decoration of the store on related approvals, including store design and fire protection, as these can take weeks or even months to procure (especially where the location is in a new mall). The store should open for business only when all licenses, permits and approvals are in place.

For stores selling food or other products that are subject to special licensing, additional steps must be completed. Examples are the Food Business License (for catering and non-catering), the Public Sanitations Permit, and the Alcohol Retail Permit. The timing and necessity of these licenses varies by location, so professional expertise is crucial.

Signing lease contracts

A good location is one of the key components for the success of a store, even more so for retailers who are relatively new to China and less well-known to Chinese consumers. As in other competitive markets, the best locations are difficult to secure, which means that the landlord is in a very strong position in negotiations over the lease.

On the other hand, signing a very one-sided lease can bring huge risks. It is never advisable to directly sign the landlord's version. Where the landlord refuses revisions and a company still wants to sign, an analysis of the legal risks can at least establish the tenant's legal position, especially when it comes to crucial clauses such as term, termination and renewal, competition and confidentiality.

As the retailer's reputation in China develops, it will become increasingly easy to negotiate more favorable lease terms. This offers a valuable opportunity, especially if background knowledge can be obtained on what the landlord has offered to others and therefore may be willing to accept.

Ensuring legal compliance

China has communicated a clear focus on consumer health and safety issues. These rules and standards also differ significantly from other jurisdictions, and so can have a major impact on retail operations. To give an example, a very successful F&B retailer in Shanghai was closed in 2017, and some of its staff imprisoned, because it was using flour that was past its formal expiration date – while in the U.S. and Europe, flour often has only a best-before date.

Product Quality and Local Standards

China has established extensive standards for all kinds of consumer products, not only for food but also for clothing, electronics, etc. This sometimes results in the ironic situation where products made in China cannot be sold in China without adjustments. For food products, these standards may extend to store organization and supplier management systems.

Failure to meet legal standards can be a serious offense and may lead to large financial penalties and even potential criminal liabilities. The authorities dealing with such matters, especially the Administration for Industry and Commerce, will investigate individual complaints. Responding to an investigation correctly and with the right amount of information is a delicate matter, but it is worth the extra attention, as an unfavorable decision can have huge financial and operational consequences.

Advertising and Pricing

A special compliance risk relates to advertisement and pricing. Areas that are regulated include discounting and minimum pricing. Violations of these rules are often used by professional buyers to extort money from retailers and producers. In the case of complaints, companies must balance between giving in too easily (encouraging more professional buyers to target them), and the cost of defending claims and even lawsuits, whether frivolous or not.

Labeling

Labeling is another sensitive area. Besides expiration dates, the composition and type of ingredients / materials should be accurately listed on the label to adhere to the stringent rules that apply in this field. Labels must be in Chinese, and meet other specific standards. Violations may result in fines, but also potential lawsuits by professional buyers.

Data Privacy

Data privacy is a "hot" topic in China. The legal framework for using private data is still being developed and is not yet as sophisticated as in many Western jurisdictions, but the recently-adopted PRC Cyber Security Law (effective 2017) shows purpose. The law puts the burden on "network operators" (i.e. owners and administrators of networks and network service providers) to protect "personal information" on information networks. Moreover, certain kinds of personal information and other important data must only be stored domestically (i.e. in China). Violations of the law can result in high penalties and even detention of those persons responsible.

Employment

When operating stores, employees form an integral part of the company. Chinese labor laws are strict and tend towards protecting the employee. Establishing strong employment contracts and official company rules (in the form of a staff handbook), and adopting these rules in a legal manner, are key steps to lower incompliance risk and create more leeway to manage (and where necessary) terminate employment contracts. A retailer should also consider whether to use standard working hours for employees, or alternative systems (flexible or comprehensive working hours) subject to special approval.

Trademark Protection for Retailers

The protection of intellectual property (IP) such as trademarks is a key concern for foreign businesses in China, because IP helps to determine their identity and distinguish between other brands, in particular domestic ones. For retailers, this is arguably even more important, because retailers are consumer-facing and because reputable landlords, advertisers and especially online platforms will require trademark ownership before beginning cooperation. Reviewing the trademark portfolio and making sure that all relevant brand names are protected in the correct classes and subclasses is not only a prerequisite to the start of China operations, but should be repeated on a regular basis.

For international companies that are new to the country, this can present a huge problem. It is common to find that one's international trademark has already been registered in China by another party, often a squatter. China's trademark protection system is first-to-file, and despite exceptions for well-known trademarks and trademarks registered in bad faith, it can be hugely complex and costly to get back a trademark once it has been registered by a third party. Therefore, companies should always register trademarks as quickly and as broadly as possible, preferably directly in China (instead of using the international Madrid system). If too late, then a comprehensive strategy is needed to get back the trademarks.

Another aspect particular to China: not all Chinese consumers speak or read English fluently, so it is important to come up with a good Chinese brand name that can adequately represent the business. This brand name should also be registered in all relevant classes and sub-classes.

Conclusions

China is the land of opportunity for many international retailers. The large, growing and relatively sophisticated market of consumers interested in high-quality international brands, which is increasingly willing to pay for premium products, is a dream for many. Not every retailer that enters the China market is able to take advantage of these factors, but successes are easy to find.

There are plenty of factors that may contribute to success in China, not all of them under the company's control. When it comes to legal challenges, an international company should be able to avoid big surprises. Company structuring, lease contracts, trademark protection and legal compliance are all subjects that can be managed effectively with timely investment in resources and the right external support.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Maarten Roos
Robin Tabbers
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions