May 28, 2014
Mr. Edward Lehman
Lehman, Lee & Xu
Beijing, China
Contributors: Jacob Blacklock, Tina Dong, Myra Kong, Crys Zheng and Kenan Jiang
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Copyright, 2014
WFOE:
 Wholly Foreign Owned Enterprise
 Most common foreign invested company
in China
 Limited Liability up to Capitalization
Governing Law:
• The Company Law
• The Law on Foreign-Invested Enterprises
• Rules for the Implementation of the Law
on Foreign-Invested Enterprises
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Other Investment Options:
• Chinese-Foreign Joint
Ventures
• Chinese-Foreign Joint Stock
Limited Liability
• Partnership Enterprises
All Foreign invested enterprises must comply with China’s
Catalogue of Industries Governing Foreign Investment, According
to the Catalogue the products sold by LG Health & Beauty fall into
the following categories:
• Health food is categorized as Encouraged
• Cosmetics and jewelry are categorized as Permitted
However, the general practice of “Direct Sales” is a Restricted
industry under the Catalogue, and requires special licensing.
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Process
Estimated Time
Delivery of Reports
Reply within 30 days
Application for
Incorporation
Decision within 90
days of submission
Business License
Application
Must be filed within
30 days – approval in
5
Post Registration
Procedures
Completed within 30
days of obtaining BL
Contribution of
Capital
Within 90 days of
obtaining BL
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Total Cost of Establishment:
• Total amount of all
Administrative Fees is
about￥2000 RMB excluding
any agency fees.
• Capital Contribution costs will
vary according to business needs;
A company must have RMB 80
Million in paid-in capital for
Direct Selling license.
VAT
Surcharges
• Small scale VAT taxpayer is subject to 3%
tax rate and VAT input is not deductible from
Output
City Maintenance: 7% of “turnover tax” (VAT
+ business tax + consumption tax)
• Annual sales of WFOE generated from
product trading exceeds .8 million RMB, the
WFOE will be assessed as General VAT
taxpayer, and subject to 17% VAT tax rate
for the sale of products.
• As General taxpayer, VAT input is deductible
from VAT Output
Education: 3%
Local Education: 2%
Corporate Income Tax
25% on audited taxable income
Withholding Taxes
Dividends, Royalties, Service Fees, Interest,
Others
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Direct Selling in China is Governed by The Regulation on Direct Selling Administration.
Definitions
Article 3:
• For the purposes of these Regulations, the term “Direct Selling” means a form of distribution
by which a Direct Selling enterprise recruits Direct Sellers to directly market products to end
consumers (hereafter, the “consumers”) outside the fixed business premises.
• For the purposes of these Regulations, the term “Direct Selling Enterprises” means
enterprises that have been approved in accordance with the provisions hereof to sell products
by way of Direct Selling.
• For the purposes of these Regulations, the term “Direct Sellers” means persons that directly
market products to consumers outside the fixed business premises.
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Product Categories:
• Cosmetics (including personal care
products and beauty salon
products);
• Health Food (obtained certificate
of the Health Food);
• Cleaning Products (including
personal sanitary products and
living cleaning products);
• Health Equipment; and
• Small-sized kitchenware.
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Authorities Governing Direct Selling:
Department of Commerce
Department of Industry and Commerce
Authorities Governing Products:
Cosmetics and Health Foods:
China Food and Drug Administration
Registration of Imported Health Foods:
According to the Administrative Measures on Registration of Health Foods, Health Foods shall be registered
with CFDA. For imported Health Foods, the foreign manufacturer is the only qualified applicant.
The documentation required for registration are as follows:
1. Registration Application Form;
2. Incorporation Certificate;
3. Name of the Health Food, along with a search result showing such name is not in the CFDA’s system should also be
presented;
4. Letter of Guarantee stating the Health Foods do not infringe any existing patent rights;
5. Trademark Registration Certificate (if any);
6. Research and Development Report of the Health Food (including the development plans, development process, expected
results etc.)
7. Formula of the Heath Food (including the principal raw materials and accessories) and the supporting materials for the
formula; the sources of the raw materials and accessories and the supporting materials for using these raw materials and
accessories;
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Registration of Imported Health Foods:
8. Functional components /Main components and their contents, and the inspection methods of the Functional components/Main
components;
9. A diagrammatic sketch of the production process and a detailed illustration and relevant research materials;
10. Quality Standards and an illustration of the quality standards;
11. The types, names, quality standards of the packages which directly contain the products and the supporting
materials for such packages;
12. Test Report from the Lab listed by CFDA;
13. Samples of the Product Label and Product Introductions;
14. Other materials;
15. Two Units of Packaged Products;
16: Certificate issued by foreign country’s competent government authority stating that the foreign manufacturer
complies with relevant laws or regulations of such country;
17. Registration Certificate of the Representative Office of the foreign manufacturer under the circumstances that the RO
on behalf of the foreign manufacturer, file the papers with CFDA.
From the date the papers are filed with CFDA, it should take no less than 85 working days to be issued the Registration
Certificate. Without the Registration Certificate, Health Foods from outside mainland may not be imported into China.
The Certificate will be valid for five years and the applicant shall apply for re-registration before 3 months prior to the
expiration date.
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Registration of Imported Cosmetics (required documents):
1. Application Form;
2. Name of the Cosmetics and the supporting materials;
3. Formulation of the Cosmetics;
4. Quality Control for the Cosmetics;
5. Original Packages of the Cosmetics and the Packages which will be used in the Chinese market, along with the label and
instructions of the Products;
6. Test Report issued by a Lab designated by CFDA;
7. Safety Evaluation Report;
9. Commission Letter regarding the source of the raw materials of the cosmetics;
10. Certification of the Cosmetics are manufactured and sold in such foreign country;
11. Other documents;
12. A diagrammatic sketch of the production process and a rough illustration;
13 Technical Requirements in writing and in electronic version;
14 Samples of the Cosmetics.
It will take no less than 20 working days to get a Certificate. Without the Certificate, Cosmetics from outside mainland cannot
be imported into China.
The Certificate will be valid for four years and the applicant shall apply for an extension before 4 months prior to the
expiration date.
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Qualifications to become a Direct Selling
Enterprise:
• The investor must have good business
reputation and no record of operation in
major violation of law in the five
consecutive years. A foreign investor must
have at least three years of experience in
Direct Selling activities outside China;
• Paid-in registered capital is not less than
RMB 80 million.
• The security deposit has been fully paid to
the designated bank.
• An information filing and disclosure system
has been set up as required by law.
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Restrictions:
In order to Engage in Direct Selling, an
Enterprise must establish a Branch office in the
local jurisdictions in which the Direct Selling
Activities will take place.
Timeline:
The Department of Commence will provide
a decision on the granting of the Direct
Selling license within about 90 days from
the receipt of the complete application.
Documents Required for Application:
• Materials proving that the qualifications to become a Direct Selling Enterprise are
met.
• The Articles of Association of the enterprise and any Joint Venture Contract.
• The Marketing Plan Report, including a service outlet plan for the Direct Selling
area approved by the local people’s government at the county level or above.
• Product descriptions that meet the State standards.
• Sample of the marketing contract to be signed with direct sellers.
• The capital verification report issued by an accounting firm.
• The agreement between the enterprise and the designated bank on the use of
security deposit.
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Security Deposit:
By law, All Direct Selling Enterprises must open a security account with an initial amount
of RMB 20 Million.
The amount required to me maintained in this account will fluctuate monthly based on
sales income, but will remain within the range of RMB 20 -100 Million.
The funds in the security account may only be accessed under the following circumstances
defined by Law:
• Failure of Enterprise to pay remuneration or refund to Direct Sellers or to customers.
• Payment of remuneration or refund to Direct Sellers or Customers in case of termination
of operation, merger, dissolution, transfer or bankruptcy, etc.
• Providing compensation for loss caused by products to customers.
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Manpower:
The following persons may not be recruited as direct sellers：
• persons under the age of 18;
• persons that have no or limited capacity for civil acts;
• enrolled full-time students;
• teachers, medical practitioners, civil servants and military personnel in active service;
• official employees of the direct selling enterprise;
• foreigners; and
• persons that are forbidden by laws or administrative regulations to hold concurrent posts.
A Direct Selling Enterprise and its branches shall sign a marketing contract with every Direct Seller they recruit,
shall conduct business training and examination on the Direct Sellers it intends to recruit, and shall issue direct
seller certificates to them after they pass the examination. No one may carry out Direct Selling activities without
signed marketing contracts or obtaining a Direct Seller certificate.
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Mandatory Information Reporting
System:
Total number of Direct Sellers of the direct selling
enterprise, Including
• Names of Each Direct Seller
• Direct Sellers Certificate Serial Number
• Occupation of the Direct Seller
• List of all former Direct Sellers
A record of the individuals in charge of the
Enterprise, its branches, and the Service Unit.,
Including: name, address, contact info for all.
List of all products sold, retail price, and
specifications of the products including major
components etc.
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A detailed explanation of the reward calculation
and incentive system for Direct Sellers.
Explanation of the refund or exchange measures
for products, including relevant address.
Telephone “hot line” of the Service Department
for customers' complaints and product disposal
procedures.
Explanation of the rights and responsibilities of
the Direct Selling enterprise and of Direct Sellers,
including the contract termination system, refund
and exchange measures, reward calculation and
incentive system, legal liability and other related
issues in accordance with the Direct Selling
contract.
List of Direct Selling trainers, and explanation of
the training and exam scheme for Direct Sellers.
Any litigation or arbitration related to enterprises.
Daily Business Operations:
Requirements of Direct Sellers:
Direct sellers shall comply with the following provisions when marketing products to consumers：
• Must show direct seller certificate and marketing contract;
• May not enter the premises of a consumer to market products in a forcible manner without the
permission of the consumer, and shall discontinue the marketing activity and leave the premises
of the consumer immediately upon the request of the consumer;
• Before closing a deal, Direct Seller shall explain the product return policy of the enterprise to the
consumer in detail; and
• After closing a deal, Direct Seller shall provide the consumer with an invoice and a sales voucher
containing such particulars as the goods return policy and the address and telephone number of
the local service outlets of the Direct Selling enterprise.
• Direct Sellers must market products to consumers at marked prices.
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Daily Business Operations:
Requirements of Direct Selling Enterprise:
The direct selling enterprises shall mark prices on direct selling products and such
prices shall be consistent with the product prices displayed at the service outlets.
Also, the direct selling enterprises shall set up and implement a goods
replacement and return system for customers and an information filing and
disclosure system for its own operations.
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The 2005 Regulation on the Prohibition of Pyramid Selling bans Pyramid-Selling
and Multi-level Marketing schemes.
Acts Constituting Pyramid Selling under the law:
• Organizers or operators sponsor persons and force the sponsored persons to
sponsor other persons, and calculate and pay the remuneration based on the
number of directly and indirectly sponsored persons; and
• Organizers or operators sponsor persons, and force the sponsored persons to
pay entry fee or pay entry fee in a disguised way such as the purchasing of
products to qualify for the program; [Starter-Kits]
• Organizers or operators sponsor persons, and force the sponsored persons to
sponsor others to build up an up and down line relationship, and calculate and
pay the remuneration to up line sponsors based on the sales of the down line.
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Criminal law of China, Article 224
Organizing, leading pyramid selling activities, such as sales of goods, services
and other business activities as, participants are required to pay fees or purchase
goods, services to join the organization, and according to the order of
composition level, directly or indirectly to develop personnel quantity as
payment of return basis, so to lure, stress participants to continue developing
other people to join in, or cheat property, disrupt social and economic order , is
less than five years imprisonment or criminal detention, and shall also be fined; if
the circumstances are serious, shall be more than five years in prison, and fined.
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Nu Skin in China:
Penalties
Fined over USD 540,000
Individual fines of $241,000
Illegal products sales and misleading local customers
Transgressions
Sold products that were not allowed
Overstated potential results
Chinese media reported “brainwashing gatherings”
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Registration:
China is a “First to File” Jurisdiction
Register in Chinese and in English
Register in mainland China, Hong Kong, and Macau
Issues:
Due to the nature of Direct selling it is often impossible to control the flow of
products. Your products may already be sold in China under an unofficial
Chinese name.
Trademarks, Domain Names, copyrights, or other intellectual properties may
be registered by a third party in an attempt to extort a payout. If it has not
already happened, the threat rises every day your product is sold in China.
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Translation
In some cases where an existing Trademark has an exact meaning a direct translation may be appropriate.
Examples:
• Apple Computers: “Ping Guo,” Chinese for“apple.”
• Microsoft: “Wei Ruan,” a combination of the exact translation of “micro” and “soft.”
Transliteration
It will more often be appropriate to choose a Chinese name which only approximates the sound of the
foreign Trademark. However, care must be taken that characters chosen for the “sound” do not have a
negative or inappropriate meaning for the product the mark is intended to represent.
Example: McDonald’s = “Mai Dang Lao”
Often, the best Trademark will be a transliteration of the sound, with specially chosen characters to
connote a positive meaning or effective product.
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