International Business and Trade Regulation Client Advisory

January 2006

Ministry of Commerce of China Delegates FICE Approval Power to Local Authorities

Since the Peoples Republic of China's government released "Measures for the Administration on Foreign Investment in Commercial Fields" (Commercial Field Investment Measures) in 2004, which allowed foreign investors to set up foreign invested commercial enterprises (FICEs) conducting trading and distribution  activities in China market, foreign companies have confronted several issues when they try to carry out relevant business. One of the most controversial issues is whether the existing manufacturing foreign invested enterprises (FIEs) and foreign invested trading companies in free trade zones such as Waigaoqiao in Shanghai, could apply to expand their business scope to cover trading and distribution.

On Dec. 9, 2005, Ministry of Commerce of China (MOFCOM) issued a Circular Regarding the Delegation of Approval Power for Foreign Invested Commercial Enterprises (FICEs) to Local Authorities (Shangzihan [2005] No.94). It will take effect on March 1, 2006. According to the Circular, the approval power of FICE will be delegated to MOFCOM at provincial level and the Administrative Committee of the Economic and Technological Development Zones (ETDZs) (for FICEs set up in state approved ETDZs).

Key Points of the Circular

The local authorities will now be responsible for the approval of the following:

  1. New FICE establishment;
  2. Expansion of business scope of foreign invested enterprises (FIEs) to include trading and distribution; and
  3. Opening of retail shops within the same municipality/province/ETDZ if the following conditions are met:

Approval from the State MOFCOM will only be required if the FICEs are of the following nature:

  1. Sales activities are conducted through television, telephone, mail ordering, internet, vending machine, etc;
  2. Trading and distribution of fundamental raw materials for industrial use, including steel, precious metal, iron ores, fuels, rubber, etc;
  3. Trading and distribution of specified products such as books, newspapers, periodicals, refined oil, automobiles, edible sugar, cotton, pharmaceutical products, etc., as specified in the Commercial Sector Investment Measures.

Implications to Foreign Investors

In this Circular, MOFCOM has clarified some controversial issues encountered by foreign investors. Foreign companies may now choose from two options. They can apply to set up a new FICE or expand the business scope to include trading and distribution. Existing manufacturing FIEs, free-trade zone trading FIEs, and investment companies may all apply to expand their business scope. The approval process can be completed at local authorities in an efficient timeframe. 

Tax Breaks for Manufacturing FIEs Engaging in Distribution Business

Since MOFCOM released the Commercial Field Investment Measures, many manufacturing FIEs have applied to expand their business scope to cover domestic distribution. To ensure that manufacturing FIEs will not become trading companies, MOFCOM issued a Notice in April 2005 indicating that a manufacturing FIE would lose tax breaks if its distribution revenue exceeds 30% of its total revenue after it incorporates distribution into its business. 

However, State Administration of Taxation (SAT) issued a Notice (guoshuifa [1994] No. 209) announcing that foreign companies may enjoy the tax breaks as long as their manufacturing revenue is more than 50% of their total revenue within a given year in the tax holiday period. According to legal sources in China, although MOFCOM did not revise its April 2005 Notice, the MOFCOM and SAT officials confirmed that the tax breaks provisions in SAT 1994 Notice are still valid. Therefore, manufacturing FIEs engaging in distribution business may continue to enjoy tax breaks as long as their manufacturing revenue is more than 50% of their total revenue. Please contact Dillon Shi (International Trade Professional), 859.244.7554 in our international services group to discuss your business' needs in China.

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