E-commerce in China

Considering the growing importance of e-commerce in China, many foreign investors are willing to enter this market. Today, China weights 668 million internet users and in the first half of 2015, e-commerce in China generated more than USD 253 billion in sales (representing almost 10% of China’s total consumer retail sales). In addition, the widespread use of social medias (such as Weibo and WeChat), where retailers can directly sell their products, while customers can pay through the platform and share their experience with other users, also fosters online sales. However, China’s regulatory framework for e-commerce is not simple and foreign investors need to get familiar with some local practices (including payments in RMB).

Considering the complexity of the legal framework, some foreign companies prefer to sell their goods through a website hosted on a server located outside China, with no onshore presence. For that purpose, the website is generally translated into Chinese, the goods are shipped to China by a postal company and the customers pay in foreign currency. Foreign entities operating this way do not need to comply with Chinese laws and regulations on e-commerce. However, this option also presents some drawbacks: foreign websites remain under the discretionary supervision of the Chinese authorities (who can decide to block the access of any unwelcome website), Internet access is slower, and because of foreign exchange policies, Chinese customers are limited in the amount they can spend on overseas purchase.

Online sales carried through Foreign Invested Enterprises (“FIEs”) established locally present several advantages: the website can be hosted on a Chinese server, which often speeds-up the access, and customers can pay in RMB directly without limitation on the amount spent. In addition, FIEs engaged in e-commerce activities can receive payments in RMB by using a third party processor such as AliPay.
Nonetheless, FIEs willing to carry e-commerce activities in China fall under the supervision and control of the Ministry of Industry and Information Technology (“MIIT”). Depending on the nature of their activities, they either need to comply with an Internet Content Provider record-filing procedure (“ICT Filing”), or to apply for an ICP license (“ICT License”) with the MIIT.
FIEs engaged in online sales as an extension of their retail activities simply need to report their website to the MIIT for ICP Filing. FIEs engaged in production activities shall first ask the approval of the MOFCOM to extend their business scope to retail activities. Once allowed to carry retail activities, they can also apply for ICP Filing. The scope of products sold online remains strictly limited to the products already sold and/or manufactured by such entities.
FIEs exclusively engaged in online sales are also subject to ICP Filing, provided they first obtained approval from the MOFCOM.
FIEs engaged in network services for other trade parties by using their own platforms, shall apply for an ICP License. Nationwide, such FIEs can only be incorporated as Sino-foreign joint-ventures where the Chinese partner shall hold at least fifty percent (50%) of the equity. In practice however, very few ICP Licenses have been granted to FIEs and apart from major foreign multinationals such as Amazon and Microsoft, ICP Licenses were only granted to fully domestic companies. The door seems to be opening to foreign investors established in the Shanghai Free Trade Zone, where the restriction on foreign equity ratio was removed, allowing such investors to set up WFOEs carrying network services through online platforms.
In both cases, the MIIT shall provide the applying entities with an ICP number, which shall be displayed prominently on the related website, together with the business license (and any other specific commercial license) of such entities. In addition, entities engaged in online sales shall establish a system for the return and exchange of goods, maintain sales records and strictly protect consumers’ privacy and commercial secrets.

September 2015

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