The number of foreign brands entering China via securing a franchising agreement has continually increased since the development of commercial franchising in the early 1990s’.
The latest regulations were issued in 2007, the Regulations on Administration of Commercial Franchise promulgated by the State Council (the “Franchise Regulations”), and they equally apply to foreign and domestic franchisors. The MOFCOM amended the Measures on Record Filing of Commercial Franchises in 2011 and the Measures for the Administration of the Disclosure of Information Pertaining to Commercial Franchises in 2012.
What are the requirements to securing a franchising agreement ?
Foreign operators can launch franchising operations in China either through cross-border franchising or by setting up a company in China.
- The Franchise Regulations state the requirement for a minimum experience: the foreign Franchisor needs to own and operate two units that can be located anywhere in the world, including in its own country, at least one year before he enters into a franchise agreement.
The foreign Franchisor needs to own and operate units for at least a year before it can sub-franchise to others.
- Franchising is not classified as a business in which foreign investment is restricted. However, in case of onshore presence with a foreign-invested enterprise, the business scope shall allow franchise activity.
What are the risks of not filing your franchise agreement with the Chinese authorities?
Any new franchise network set-up in China shall proceed to filing with the competent authority within 15 days after the first franchise agreement is signed.
The major risk is the contractual instability. In case of dispute, the Franchisee may report any incompliance with the Franchise Regulations to the authority.
In several cases, Chinese courts requalified distribution agreements as franchising agreements, and rendered judgments to terminate the “distribution agreements” and require refunding of deposit/license fee to distributors.
In addition, the franchisor may have to pay fine for the breach of the Chinese regulations.
Why may your contract be postponed for trademark registration issues?
Trademarks of the Franchisor shall be registered in China, and the trademark certificates shall be at the franchisor’s disposal. A copy of the trademark certificate is required for the filing of the trademark license contract with Chinese authorities.
The registration certificate of the trademark license contract is one required document for the filing of the franchise agreement.
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