Legal Issues on the Establishment of A Warehouse or Distribution Center in China

This a speech made at "CHINA WAREHOUSES & DISTRIBUTION CENTERS 2007".

Part One
Laws and Regulations Related to Foreign Investment in the Establishment of Warehouse or Distribution Center in China

One:  Market Entrance
1. According to the Schedule of Commitment on Service Trade made by Chinese government on access to WTO, the commitments to warehouse service are as follows:
Commercial Existence: From access to WTO, limited to joint venture and the foreign shares shall not exceed 49%. Within 1 year after access, foreign shares may have a majority. Within 3 years after access, the limitation will be eliminated and Wholly foreign owned enterprise will be allowed.

2． Relevant Laws and Regulations in China

“Notice on Working Better in the Attraction of Foreign Capital to the Logistics Area”（Ministry of Commerce, promulgated on April 20, 2006）：
“allow foreign investors to establish foreign-invested logistics enterprises in the forms of equity joint venture, contractual joint venture and wholly foreign owned enterprise within the whole country”

3． Relevant Laws and Regulations in China

“Relevant Opinions on Working on Commodity Circulation in 2001” by State of Economic and Trade Commission：
“Make developing logistic distribution as an important content to reform the traditional logistic enterprises. Use the current equipment of the enterprises, and develop, construct and reform logistic distribution centers of all kinds.”

Two: Procedures—Requirements on Investors
Investors applying for establishing a foreign-funded logistics enterprise must meet the
following conditions:
(1) Among the investors who plan to establish a foreign-funded logistics enterprise engaging in the international circulation logistics business, there shall be at least one party who has good achievements and experiences in operating international trade, international freight or international freight agency, and such an investor shall be the largest shareholder among the Chinese or foreign investors.

(2) Among the investors who plan to establish a foreign-funded logistics enterprise engaging in the third-party logistics business, there shall be at least one party who has good achievements and experiences in operating transportation or logistics, and such an investor shall be the largest shareholder among the Chinese or foreign investors.

Two: Procedures—Requirements on Intended Enterprises
(1)No requirement on registered capital, unless it is otherwise provided in the relevant laws and regulations ；
(2) for a foreign-funded logistics enterprise engaging in the international circulation logistics business, the proportion of the shares held by the investors from the outside of the territory shall not exceed 50%;

(3) it has a fixed business site;

(4) it has the necessary facilities for operating the business.

Two: Procedures— Approval Authority
Whoever intends to establish a foreign-funded logistics enterprise shall file an
application to the department in charge of foreign trade and economic cooperation of
the province, autonomous region, municipality directly under the Central Government or city directly under state planning where the enterprise is to be located, and shall submit the following documents:

Two: Procedures—Documents to be Submitted

(1) the application letter;

(2) the feasibility study report;

(3) attestations on the qualification of the parties to the joint venture;
(4) the legal attestation documents and credit certificates of the Chinese and foreign investors;

(5) the contract and the articles of association;

(6) the name list of the members of the board of directors or the joint managerial institution and the major managers as well as their resumes;
(7) the notice on pre-approval concerning the enterprise name issued by the administrative department for industry and commerce;
(8) attestation of the business site of the enterprise;
(9) other documents required by the department in charge of foreign trade and economic cooperation

Three: Land Issues
1.“Order of the Ministry of Land and Resources of the People’s Republic of China on Assignment of the State-owned Use Right by Agreement”（promulgated on June 11, 2003）：
Only when the methods of bid invitation, auction or quotation are not required by the laws, regulations and rules, may the method of agreement be applied in the assignment of the right to use state-owned land.

2. Lands which shall be assigned by means of tendering, auction and hanging out a shingle
“Provisions on the Assignment of the State-owned Use Right by Means of Bid Tendering, Auction and Hanging Out a Shingle” (Ministry of Land and Resources, promulgated on May 9, 2002 )
All kinds of lands for business use such as Commerce, travel, recreation and commercial houses shall be assigned by means of tendering, auction and hanging out a shingle at a price.
If there are more than two intended land users after the proposals of supplying lands for uses other than the above are publicized, they shall also be assigned by means of tendering, auction and hanging out a shingle.

“Circular of the State Council on Intensifying the Land Control”（August 31, 2006）
“The industrial land shall be assigned by means of bid tendering, auction or hanging out a shingle at a price not any lower than the publicized minimum rates

3. Procedures on tendering, auction and hanging out a shingle
(1)  The administrative department of land and resources at the municipal or county level shall draft the proposal for assignment of land by means of tendering, auction and hanging out a shingle, together with other departments such as urban planning, which will be implemented after it is approved by the people’s government at the same level.
(2) The assignor shall draft the relevant documents based on the situations of the assigned land and publicize an announcement at least 20 days before tendering, auction and hanging out a shingle is carried out
(3)The bidder or buyer may consult on the relevant situations of the assigned land.
(4) If it is a bidding, the bid evaluation group shall evaluate the bid documents according to the standards for and methods of bid evaluation as determined in the bid documents .
If it is an auction, the buyer who offers the highest price shall be the auction winner. If the intended buyer is less than 3, or the highest price is lower than the base price, the auction shall be terminated.
If it is hanging out a shingle, The period of hanging out a shingle shall be no less than 10 workdays. The winner shall be decided at the time when the shingle is terminated as provided on the announcement.
(5) The bid winner or buyer shall conclude with the assignor a Confirmation on Striking a Deal, and conclude the Contract on the Assignment of the State-owned Land Use Right at the time as agreed on the Confirmation on Striking a Deal.

Part Two： Laws and Regulations on M&A of Logistic Companies In China

Two ways of M&A：
Share M&A
Asset M&A

Provisions on M&A by Foreigners– General Provisions 1
“The Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors ”
（Promulgated by Ministry of Commerce, China Securities Regulatory Commission, State Administration for Industry and Commerce, State Administration of Taxation, and State Administration of Foreign Exchange on August 8, 2006 ）：
“Where a foreign investor intends to establish a foreign-funded enterprise by merging a domestic enterprise, it shall, in accordance with these Provisions, be subject to the approval of the examination and approval organ and modify the registration or go through the establishment registration in the registration administrative organ.
If the enterprise to be taken over is a domestic listed company, it shall, pursuant to the Measures for the Administration of Strategic Investment in Listed Companies by Foreign Investors, go through the relevant formalities in the securities regulatory institution of the State Council. ”
(Article 6)

Provisions on M&A by Foreigners– General Provisions 2
For an equity-based takeover, a foreign investor shall, pursuant to the total investments of the foreign-funded enterprise to be established after the takeover, the type of the enterprise and the industry it engages in, submit the provided documents to the competent examination and approval organ in accordance with the laws, administrative regulations, and rules on the establishment of foreign-funded enterprises

Provisions on M&A by Foreigners– General Provisions 3
For an asset-based takeover, the foreign investor shall, pursuant to the total investments of the foreign-funded enterprise to be established after the takeover, the type of the enterprise and the industry it engages in, submit the provided documents to the competent examination and approval organ in accordance with the laws, administrative regulations, and rules on the establishment of foreign-funded enterprises

Provisions on M&A by Foreigners– Special Provisions 1
“Notice of the Ministry of Commerce on Working Better in  Attraction of Foreign Capital to the Logistics Area”:
Any foreign-invested logistics enterprise may engage in some or all of the businesses prescribed in Article 5 of the Notice upon approval, and it will not prescribe the minimum registered capital of foreign-invested logistics enterprises any more.

Provisions on M&A by Foreigners– Special Provisions 2
Except for the enterprises that shall be subject to the examination and approval of the Ministry of Commerce according to the relevant ministerial rules or other laws and regulations on foreign investment, other foreign-invested logistics enterprises shall be subject to the examination and approval of the provincial competent departments of commerce.

Part Three：
Legal Issues which Need Attention when Conclusion of Contracts for Warehousing

One: Nature of Warehousing Contracts
◆Informal Contract
◆Consensual Contract
◆A warehouse voucher is a certificate for delivering goods to the safekeeping party and claiming the warehousing goods by the storing party

Two: Nature of Warehouse Voucher
Warehouse Voucher is not only a certificate that the storing party makes the delivery of goods, but a certificate for the storing party or other party who holds the warehouse voucher to claim the goods. The right to claim the warehousing goods may be transferred when the warehouse voucher is endorsed by the storing party or the person who holds the warehouse voucher, and signed or affixed with a seal by the safekeeping party. Any party who holds the warehouse voucher may claim to take back the goods.

Three: Items which shall be contained in a warehouse voucher
(1) title or name and domicile of the storing party;
(2) category, quantity, quality, package, number of pieces and marks of the warehousing goods;
(3) standards of spoilage of the warehousing goods;

(4) place of storage;

(5) period of storage;

(6) warehousing fee;

(7) where the warehousing goods have been insured, the amount and period of the insurance and the title of the insurance company; and
(8) name of the person who issues the warehouse voucher, the place and the date of issuance.

Four: Rights and Duties of Safekeeping Party
1． In the event that the safekeeping party discovers that the warehousing goods are deteriorated or otherwise damaged, the said party shall inform the storing party or the holder of the warehouse voucher of the case promptly.

2． Where there is no agreement in the contract between the parties as to the period of the storage or such agreement is unclear, the storing party or the person who holds the warehouse voucher may claim and get back the warehousing goods at any time, the safekeeping party may also at any time request the storing party to claim the warehousing goods, provided that a time period  necessary for preparation shall be given.
3． When the storage period expires, the storing party or the holder of the warehouse voucher shall claim and get back the warehousing goods. Where the storing party or the holder of the warehouse voucher fails to claim the goods on time, additional warehouse fee shall be paid.
Where the goods are claimed before the time period expires, the warehouse storage fee shall not be reduced.
4． Where the storing party or the holder of the warehouse voucher does not claim the warehoused goods when the time period expires, the safekeeping party may urge the holder to claim the goods within a reasonable period.
After this additional period expires, the safekeeping party may have the goods deposited.
5． If, during the period of storage, the warehousing goods are damaged, destroyed or lost due to improper storage by the safekeeping party, the safekeeping party shall be liable for damages. Where the warehousing goods are perished or damaged due to inconformity of the character of the warehousing goods or of the packing with the terms of the contract, or the fact that the goods exceed the valid storage period, the safekeeping party shall not be liable.

Part Four:
Laws and Regulations on Bonded Warehouses in China

One: Export Supervised Warehouse
“Measures of the People’s Republic of China for the Customs to Administer Export Supervised Warehouses and the Goods Stored Therein” （Promulgation Date: November 28, 2005）:
“Export supervised warehouse” shall refer to a special customs supervised warehouse, which was established upon approval of the customs office, is used for storage of goods whose customs procedures for export have been finalized or for bonded logistics distribution, or is used to provide circulative value-added services.

1． Establishment of Export Supervised Warehouse

The responsibility to accept the application for the establishment of an export supervised warehouse shall remain with the competent customs office at the locality of the export supervised warehouse, while the power to examine and approve the application shall remain with the customs office directly under the General Administration of Customs.
A business operational enterprise that applies for the establishment of an export supervised warehouse shall meet the following conditions:
(1) It has been registered by the administrative department for industry and commerce, and has the status as an enterprise legal person;
(2) It has the right to engage in import and export and that to engage in warehousing;
(3) Its registered capital is RMB 3,000,000 Yuan or more;

(4) It is capable of paying duties to the customs;

(5) It has a special place for storage of goods, which shall be no smaller than 5,000 square meters in case of an export distribution warehouse, or no smaller than 1,000 square meters in case of a domestic carry-over warehouse.

If the application meets the relevant conditions after examined by the customs, the customers will issue an approval certificate.
An enterprise that applies for the establishment of an export supervised warehouse shall, within 1 year as of the customs office’s issuance of the approval document, apply to the customs office for check and acceptance of the export supervised warehouse.
Where an enterprise fails to apply for check and acceptance within the time limit without any justifiable reason or is found unqualified from the check and acceptance, the approval document for its export supervised warehouse shall be invalidated automatically.

2． Management on Goods in the Export Supervised Warehouse
A The term of storing certain goods in an export supervised warehouse shall be 6 months
B A warehouse operation enterprise shall notify the consigner or its agent to go through the procedures for the exit or import of the goods.
C The goods stored into an export supervised warehouse shall not be essentially processed.

Two: Bonded Warehouses “The Provisions of the Customs of the People’s Republic of China on the Administration of Bonded Warehouses and the Goods Stored Therein”
（Promulgation Date: December 5, 2003）
“Bonded warehouses” refers to the warehouses that are established upon approval of the customs for exclusive keeping of bonded goods and other goods that have not gone through customs clearance, including public bonded warehouse and self-use bonded warehouse

1． Goods may be stored in bonded warehouses

(1) Imported goods for processing trade;

(2) Transit goods;

(3) Oil, materials and maintenance spare parts for vessels and aircrafts engaged in international voyages or flights;
(4) Imported consignments of spare parts for maintenance of foreign products;
(5) Goods temporarily stored by foreign businesspeople;
(6) Ordinary trade goods that have not gone through customs clearance; and
(7) Other goods that have not gone through customs clearance and that are approved by the customs office.

2． Conditions for enterprises to operate the warehouse
(1) Having registered with the department of industry and commerce administration and having the status of enterprise legal person;
(2) Having a minimum registered capital of RMB 3 million Yuan;

(3) Being able to pay taxes to the customs office;

(4) Having special business premise for storage of bonded goods;
(5) If engaging in storage of commodities subject to special license, having the prescribed special license;
(6) As for a processing trade enterprise engaging in operation of bonded warehouses of stock materials, having a minimum export volume of 10 million US dollars; and
(7) Other conditions provided for by the laws, administrative regulations and customs rules.

3 Conditions to be Satisfied by the Bonded Warehouse
(1) Conforming to the requirements of the customs office on the layout of bonded warehouses;
(2) Possessing the safety segregation facilities and control facilities that meet the requirements of customs control and other facilities necessary for business operations;
(3) Possessing the computer management systems of bonded warehouse that meet the requirements of customs control and that are connected with the customs office;
(4) Having the management systems of bonded warehouse that meet the requirements of custom control and the accounting systems that meet the requirements of the accounting law;
(5) Conforming to the laws, administrative regulations and relevant provisions of the state on land administration, planning, transportation, fire control, safety, quality inspection, and environmental protection, etc;
(6) As for a public bonded warehouse, having a minimum area of 2,000 square meters;
(7) As for a bonded warehouse of liquid dangerous goods, having a minimum volume of 5,000 steres;
(8) As for a bonded warehouse for consignment and maintenance, having a minimum area of 2,000 square meters; and
(9) Other conditions provided for by laws, administrative regulations and customs rules.

4 Examination and Approval on Bonded Warehouses
Where an enterprise applies for establishing a bonded warehouse, it shall file an written application with the competent customs office of the place where the warehouse is to be located, and submit the relevant certificates prescribed in Articles 8 and 9 of the Provisions.

5 Management on Goods Stored in Bonded Warehouses
A The storage period of the goods stored in a bonded warehouse is one year
B The goods stored in a bonded warehouse may go through simple processing, such as packaging, grading and classification, adding shipping marks, dismantling, and assembling, etc., but no substantial processing is allowed.

Three: Bonded Logistics Centers (Type A)
“The Interim Measures for the Administration of Bonded Logistics Centers (Type A)”
（General Administration of Customs, Promulgation Date: June 23, 2005）

Bonded Logistics Centers (Type A) refers to the customs surveillance places as approved by the General Administration of Customs that are operated and specially undertaken by legal person enterprises within the territory of China to undertake business operations of bonded warehousing logistics

1. Choice of Places

The logistics centers shall be established in those places with big international logistic demand and convenient communications where the customs surveillance is easy to be carried out.

2. Conditions which shall be met by an Enterprise to Operate the Logistics Center
(1) It has been registered by the administrative department of industry and commerce and has the status of a legal person;
(2) Its registered capital shall be no less than RMB30 million Yuan;
(3) It has the ability to pay taxes to the customs and to perform any other legal liabilities;
(4) It has a business place for goods storage and has the land use right of the business place. Where the entity leases any land or place from any other person for business operation, the leasing term shall be no less than 3 years;
(5) Where an entity engages in any storage of commodities subject to special licensing, it shall hold the prescribed special license;
(6) Where an entity operates a self-use logistics center, the annual import and export amount (including the deep processing carry-over) in eastern regions shall not be lower than US $0.2 billion and that in the mid-western regions shall not be lower than US $50 million; and
(7) It shall have a management system that meets the requirements of the customs surveillance and an accounting system that observes the provisions of the Accounting Law.

3． Conditions to be Met when Applying for Logistics Center
(1) It meets the requirements of supervision, planning and construction of logistics centers by the customs;
(2) As for the warehousing area of a public logistics center (including a yard), it shall be no less than 20,000 square meters in the eastern regions and it shall be no less than 5, 000 square meters in the mid-western regions;
(3) As for the warehousing area of a self-use logistics center, it shall be no less than 4,000 square meters in the eastern regions and it shall be no less than 2, 000 square meters in the mid-western regions;
(4) It shall establish a computerized management system that meets the requirements of the customs surveillance, provide the terminal equipment for the reference of data by the customs, and, in light of the certification means and data standards as prescribed by the customs, get connected to the customs through the platform of "electronic port" so as to realize the data exchange and information pooling between the customs and such departments as state taxation and foreign exchange on an uniform platform;
(5) It shall establish such supervision and office facilities as safety segregation facilities, video supervision and control system that comply with the requirements of the customs surveillance; and
(6) It observes such laws, administrative regulations, rules and relevant provisions of the state in such aspects as land administration, planning, fire control, security, quality inspection and environmental protection.

4. Approval Authority

An application for the establishment of a logistics center shall be accepted by the customs directly affiliated to General Administration of Customs and shall be reported to the General Administration of Customs for examination and approval.

5． Operations may be Carried out by Enterprises Operating Logistics Centers
(1) Bonded warehousing of imported or exported goods and any other goods that haven't gone through the customs clearance;
(2) Provision of circulating simple processing and value-adding service for stored goods;
(3) Global purchase and international allocation and distribution;
(4) Transit trades and international transfer business; and
(5) Any other international logistic business operation as approved by the customs.

Four: Bonded Logistics Centers (Type B)
“The Interim Measures for the Administration of Bonded Logistics Centers (Type B)”
（Customs of the People's Republic of China, promulgated on June 23, 2005）

"Bonded logistics center (type B) " refers to a concentrated surveillance place of
the customs as approved by the General Administration of Customs that is operated by a Chinese domestic enterprise with legal person status and where many enterprises enter to undertake the business operations of bonded logistics warehousing.

1． Conditions to be Satisfied by the Enterprises in the Logistics Centers
(1) As for the warehousing area of a logistics center, it shall not be less than 100,000 square meters in the eastern regions and it shall not be less than 50, 000 square meters in the mid-western regions;
(2) it satisfies the requirements of supervision, planning and construction of logistics centers set forth by the customs;
(3) The location is close to the traffic hubs of ports, airports and roads and shall be the inland places with big international logistics demand and convenient communications where customs offices are located and the collective customs surveillance is easy to be carried out.
(4) It has been recognized by the people's government at the provincial level, complies with the overall planning of local economic development and satisfies the demands of the development of processing trades for bonded logistics;
(5) It establishes a computerized management system that meets the requirements of the customs surveillance, provide the terminal equipment for the reference of data by the customs, and, in light of the certification means and data standards as prescribed by the customs, get connected to the customs through the platform of "electronic port" so as to realize the data exchange and information pooling between the customs and such departments as state taxation and foreign exchange on an uniform platform; and
(6) It establishes such supervision and office facilities as safety segregation facilities, video supervision and control system that comply with the requirements of the customs surveillance.

2． Requirements of Qualification on an enterprise that operates a logistics center
(1) Having been registered by the administrative department of industry and commerce and having the status of a legal person;
(2) Its registered capital being no less than RMB50 million Yuan;
(3) Having the ability of performing daily administration of the enterprises in the logistics center; and
(4) Having the ability to assist the customs in performing the surveillance over the goods into or out of the logistics center and over the business operations of enterprises in the logistics center.

3． Requirements on an enterprise in a logistics center
(1) Having the status of a legal person or being a branch of an enterprise outside the logistics center under any special circumstance;
(2) For a legal-person enterprise, the minimum of its registered capital being RMB 5 million Yuan; For any branch of an enterprise, its registered capital being no less than RMB 10 million Yuan;
(3) Having the ability to pay taxes to the customs and perform any other legal duties;
(4) Establishing a computerized management system in line with the requirements of the customs surveillance and getting connected to the customs; and
(5) Having a special place to store the goods under the customs surveillance within the logistics center.

4． Business Operations may be Carried out by An Enterprise in a Logistics Center
(1) Bonded warehousing of imported or exported goods and any other goods that haven't gone through the customs clearance;
(2) Provision of circulating simple processing and value-adding services for stored goods;
(3) Global purchase and international allocation and distribution;
(4) Transit trades and international transfer business; and
(5) Any other international logistic business operation as approved by the customs.