China: Going Global: The Current Landscape Of Franchising In China

Last Updated: 31 July 2018
Article by IPO Pang Xingpu

Co-authored by Sofie Gleditsch*

Franchising in China emerged in the late 1980s, with American fast-food chain KFC paving the way. Soon after, several other multinational companies entered and expanded into the Chinese market. In 1997, China issued its first regulation directed at providing guidance on franchising. However, foreign direct franchising remained of limited reach due to a lack of specific provisions governing it. As it then were, foreign companies were required to seek approval from China's Ministry of Commerce ('MOFCOM') before registration of its franchise.

Today's landscape paints a different picture. As part of China's accession into the World Trade Organization, new regulation and measures were enacted and with it the abolishment of the requirement to seek pre-approval from MOFCOM. Although franchisors are not required to obtain pre-approval from MOFCOM before carrying out franchising projects, the law does require franchisors to file with MOFCOM prior to franchising.


Franchising in China is regulated by the Regulation on the Administration of Commercial Franchises ('Regulation'), the Administrative Measures for the Registration of Commercial Franchises and the Administrative Measures for Information Disclosure of Commercial Franchises.

According to the Regulation, to successfully franchise into China, the prospective franchisor must be a business, not an individual. Secondly, the business must have a registered patent or trademark in China. Thirdly, the franchisor must demonstrate that it has a mature business model. To do that, the franchisor must show proof that it, or "a directly operated outlet" of the franchisor, has operated at least two franchise units for at least one year. This is often referred to as the "2+1 rule".

The MOFCOM released the revised Administrative Rules on Commercial Franchise Filing ("the Rules") on December 12, 2011 and the Rules entered into effect on February 1, 2012. The revised rules provided certain improvements and clarifications on franchise filing, but it fails to address the "2+1 rule" with sufficient clarity.

One of the on-going uncertainties in relation to the "2+1 rule" is that the franchise regulations do not indicate how the MOFCOM will determine ownership and what types of "directly operated outlets" will satisfy the requirements of the "2+1 rule." The Draft Filing Rules released in April 2011 for public comment proposed provisions to clarify the rule. However, all these proposed provisions were removed from the final Revised Franchise Filing Rules. It remains unclear the intention of removal of such provisions, and whether future regulations or rules will clarify these issues.

Due to such uncertainties, the MOFCOM exercises discretion in its application of the "2+1 rule." Fortunately, the MOFCOM has provided some guidance on the interpretation of "directly operated outlets." Outlets directly operated by a related company of the franchisor qualifies as "directly operated outlets" of the franchisor under the "2+1 rule" when the following two conditions are met.

  1. The related company refers only to the parent company, or a wholly owned enterprise, of the franchisor, or a company in which the franchisor owns a controlling interest;
  2. The directly operated outlets of the related company engages in the same type of business as the franchisor, and conduct business under the same brand as the franchisor.

Under such circumstances, the franchisor shall submit the following documentation to satisfy the "2+1 rule."

  1. Proof of the relationship between the related company and the franchisor in terms of ownership;
  2. Proof that such relationship has been in existence for at least one year.

As shown by our recent experience with a franchisor, a mere overlap of shareholders between two companies does not satisfy the relationship requirements according to the MOFCOM.

The MOFCOM rejected the company's filing for its failure to comply with the "2+1 rule." The franchisor is a newly established entity, and thus does not own any franchise units that have operated for at least one year. The franchisor claimed another company to be a "related company" of the franchisor based on an overlap of shareholders between the two companies, and that company owns two directly operated units for at least one year. However, according to the MOFCOM, that company does not qualify as a "related company" of the franchisor for purposes of the "2+1 rule," because the "related company" under the "2+1 rule" refers only to the parent company, or a wholly owned enterprise, of the franchisor, or a company in which the franchisor owns a controlling interest.

In practice the MOFCOM has relaxed the requirements of the "2+1 rule", in the sense that units operated by certain related companies of the franchisor qualify as "directly operated outlets" of the franchisor (assuming the aforementioned two conditions are met). Further, Chinese courts generally agree that a franchisor may demonstrate a mature system without complying with the "2+1 rule," which in practice means that the franchise agreement will be valid (assuming non-compliance with the "2+1 rule" is properly disclosed). However, registration with the MOFCOM will be problematic.

Additionally, when  all of the legal criteria are met, the franchisor must file an application to the MOFCOM to register its franchise within 15 days of signing a franchise agreement. The documents necessary for submission are outlined in Art. 8 of the Regulation. The franchisor must also disclose information to the franchisee about itself and its franchise at least 30 days before a franchise agreement is signed. The required information to be disclosed includes, but is not limited to, the following: the franchisor's business resources; financial statements and audit reports from the past two years; services provided, such as training and operating systems; and any litigation and arbitration proceedings involving the franchisor related to the franchise. Although Chinese law does not stipulate that franchise agreements be written in Chinese, the franchisor must submit those agreements in Chinese in addition to English versions, because the MOFCOM will likely reject the entire application if the franchisor does not provide a Chinese version of the agreements. all

Although the Rules require a franchisor to record with the MOFCOM, failure to record or file does not render a franchise agreement invalid. Further, failure to make the record filing does not preclude the franchisor from operating franchises in China. However, such failure may incur fines by the MOFCOM. According to the Rules, if a franchisor fails to file with the MOFCOM, the MOFCOM shall order the franchisor to file within a specified time limit and impose a fine of not less than RMB10,000 but not more than RMB50,000. If the franchisor fails to file within the specified time limit, the MOFCOM shall impose a fine of not less than RMB50,000 but not more than RMB100,000.


As franchisors enter the Chinese market, of crucial concern is infringement or misuse of intellectual property. China operates a first-to-register trademark system. As such, any person can register a foreign trademark so long as the trademark is not illegal and has not been previously registered with the China Trademark Office. A number of notable cases, including Apple v Shenzhen Proview and Starbucks Corp. v Shanghai Xingbake Cafe Corp., demonstrate the issue of so-called 'trademark squatters'. In the former case, a Chinese court held that Proview registered the trademark 'iPad' in China before Apple did, despite Apple having created the brand's value. Consequently, Apple paid $60m to settle the dispute. To avoid falling into the trap of trademark squatters, potential franchisors must ensure their IP is protected under Chinese law. Franchise agreements should contain specific clauses regarding IP use.

Some academics and journalists argue global firms who made large chunks of their profits from franchising overseas are in retreat. Many franchisors are facing domestic competition, as support and demand for local franchises grows. For example, Uber recently sold its Chinese operations to domestic rival Didi Chuxing. Without a proper understanding and catering to local customs, franchisors may face difficulties appealing to consumers. In addition, different regions or provinces may have different preferences. As a solution, franchisors may consider making alterations to, for example, menu items. KFC's China executives understood that Chinese consumers prefer an abundance of flavors, and so decided to expand their menu to enhance success. Similarly, Nestle appointed country managers who may deem certain products proposed by the head office to not suit local consumers. Finding a strong local partner can be crucial to ensuring success in China, as local companies may have a deeper understanding of local consumer needs.


Although global trends show a decline in multinational companies franchising overseas in sectors offering food, beverage or retail services, there is an abundance of opportunity within other expanding sectors. In early 2017, the Government of Shanghai promoted the opinion that foreign companies should invest, through franchising, in areas of energy, infrastructure and environmental protection. Furthermore, during a press conference in 2017, MOFCOM announced its plan to revise current regulation to streamline the filing process. This suggests a further opening of the Chinese franchising industry for foreign companies.

*Sofie Gleditsch is a law student at King's College London.

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

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

Similar Articles
Relevancy Powered by MondaqAI
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
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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 (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

To Use 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.


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.


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