As China relaxes restrictions on e-commerce, international companies have begun to clamor to enter the market. To be successful in this sector, you should have working knowledge of the crossroads of legal and e-commerce in China.

First, you should consider your choice of entity and how you plan to conduct business in China. Do you plan to remain overseas and export from your own country or do you plan on having a presence in China? Related considerations also include what kind of products are you offering, place of storage of your products, the location of your server, if you need to employ local staff, payment and tax issues and the legal possibilities of your business model.

Legal pic

You can choose to offer your products through a foreign website (website located outside of China) but this will limit your growth. Your website might not be accessible in China, the ways to receive payments are limited and you will not be considered as acting in line with local regulations. If you prefer local presence in China, there are different types of vehicles that are available to foreign investors, e.g. representative office, wholly foreign owned enterprise and joint venture. After you have set up a subsidiary with a store in China, you have to register a website which then can sell the same products online as the one in your store.

To avoid to have to set up your entity in China, you can consider selling through the various B2C e-commerce platforms in China, which include Tmall, Wechat, JingDong, YiHaoDian, and Amazon.cn although this has other disadvantages (higher costs and competition). All major platforms require a security deposit, a technical fee, and a commission per transaction. You can choose whether merchandise will be shipped from your country or stored in a warehouse within China.

If you want to offer products from third parties through a platform, you will have to try to obtain a different license. As of June 2015, foreign investors are allowed to wholly own “online data processing and transaction processing” entities which was prohibited or limited in the past. However, the procedure is still not easy and can take between 18-24 months to receive the proper approvals and permits if you succeed in obtaining them.

Interesting to know in this respect is that in the past, it was very restricted for foreign invested companies to be active in e-commerce in China, and different structures were used to make it possible to participate. So, for example, companies like baidu.com and the Alibaba group made use of the “VIE-structure” which meant that the control over the Chinese company was by contracts instead of by equity. In this situation, the Chinese company would legally be in hands of Chinese national(s) but the “economic owners” rely on agreements with the formal owner(s). The legislation has announced that this structure will not be accepted in the near future anymore.

In the end, the e-commerce business is developing at a rapid pace to which the legislators have had a difficult time developing the accompanying legislation at the same rate. In addition to this, e-commerce is typically an industry that was, and continues to be, restricted for foreign investment. The current trend is that the Chinese government is opening this industry up but in practice, the legal status of some e-commerce activities may still be unclear and it is still uncertain if the government will issue related licenses. Having an expert guide you through this process can be extremely beneficial.

Written by: Choy Yiu Chan
Foreign Lawyer in China/Local Partner, Bonnard Lawson