Foreign investors can enter into distribution arrangements with Chinese distributors who already have distribution networks in China. Drafting carefully your distribution agreement with your Chinese. Indeed, distributor is essential as there are significant and varied legal restrictions on distribution agreements in China, as compared to other countries.
Essential contract stipulations (distribution arrangements)
- Non-compete clause: prevents the distributor from selling, reselling, manufacturing or purchasing products that compete with products of the supplier;
- Territorial restrictions: the distributor may agree to only resell the supplier’s products in a specific geographic area;
- Customer restrictions: a supplier may agree to sell its products to a distributor for resale only to a particular group of customers. And this rather than designate distributors to an exclusive territory. For example, the suppliers of a high-technology product may decide to only supply its products to one distributor for sales to corporate customers. And to reserve for itself sales to small businesses or individuals;
- Confidentiality: when drafting a distribution contract including the grant of an exclusive right to use trade secrets, special attention shall be given as to whether the distributor should be able to act unilaterally when enforcing infringement of trade secrets before Chinese courts;
- Taxes: withholding taxes will apply when payments are carried out from an onshore payer to an offshore party. The withholding taxes shall be paid by the onshore payer before the remittance. It is important to stipulate that the amount remitted to the offshore party after withholding taxes shall be equivalent to the invoiced amount;
- Post-termination non-compete clause: the distributor would be required not to compete with the supplier or other distributors following the termination or expiration of the distribution agreement.
- Reserve of ownership: reserve of ownership can be stipulated in a sales contract in China. However, the seller cannot claim for restitution if 75% or more of the price has been paid.
- Independent contractors: to ensure that the distributor will be responsible for its own actions, the agreement shall contain provisions. They must indicating that the distributor is an independent contractor rather than an employee of the supplier.
- Online/offline sale clause: supplier may require that the distributor or e-commerce intermediaries do not sell products outside the assigned territory. With the major evolution of online sale in China, specific requirements may be stated. They allow to request to the distributor to provide more reports as to sales by territory. And some distribution systems have a specific fee or ‘invasion fee’ for sales out of its authorized territory.
-> This article may also be of interest to you : Franchise in China – Contractual Options
To know more, download our legal handbook related to contractual options in China…
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