FAQ on Direct Sales in China
Q. 1 Could you please introduce the regulation on Direct Sales?
A. Two regulations, namely the Regulation on Direct Sales (i.e. Order of the State Council No.443), and the Anti-chuanxiao (Pyramy Selling) Regulation (Order of the State Council No.444), both adopted in 2005, govern the direct sales industry in China.
According to the Regulation on Direct Sales a company must obtain an approval from the government before it is allowed to engage in any direct selling or even establish a local company that intends to engage in such activities. With the introduction of the mentioned Regulation direct selling is formally taken as legal activity in China, but within the limits established by the Anti-chuanxiao Regulation, which specifically prohibits the so called Pyramid selling.
Q. 2 What is the difference between legitimate direct sales and the so called “pyramid scheme”?
A. It should be clear that certain fundamental differences exist between legitimate direct sales and the fraudulent Pyramid scheme. For example, the requirement that sales personnel make upfront investments in inventory, the absence of a return-and-refund policy, and compensation based on number of people recruited are the marks of fraudulent scheme, or chuanxiao. Legitimate direct sales do not permit such practices, and have adequate consumer safeguards in their operations. Substantaly direct selling is a type of business model in which direct selling companies recruit sales promoters to sell products directly to end consumers outside the companies’ fixed outlets.
Q. 3 What are the requirements to initiate Direct Sales?
A. It is necessary to obtain the specific “Direct Sales License” from the Ministry of Commerce, which will issue the license to engage in direct sales activities only if the company meets the following requirements:
1. The applicant shall have sound business credit, and has no records of serious illegal operation during the past five years before filing the application; the company shall also have undertaken direct selling business for at least three years outside China;
2. The paid-in registered capital must not be less than RMB 80 million;
3. The deposit has been paid in full amount in the designated bank according to the provisions of the Regulation on Direct Sales.
Q. 4 What is the procedure to obtain the Direct Sales License?
A. The applicant for the Direct Sales License has to set-up a FIE (i.e. Foreign Invested Enterprise) in the form of a WFOE, thus it is necessary to get the approval of the MofCOM for this proposed investment. The investment is going to be approved only if the investor meets all the requirements listed above.
The procedure is the same as for setting up a WFOE:Examination and Approval Department:
Municipal bureau of commerce
Within 100 working days
Documents and certificates to show the enterprise is capable of doing direct-selling.
Marketing plans reports, and service network plans in direct-selling area authorized by at least a local people’s government at county level
Instruction of the products according to the national standards.
Samples of sales promotion contracts to be singed with salesperson.
Credit certificates issued by accounting firms.
Agreements between enterprises and banks in using deposits according to law.
Any other requirements by the Bureau of Commerce.
Q. 5 What are the permissible product categories?
A. The Direct Sales Regulation limits the products direct sales companies can sell to just five product categories: 1) cosmetics, 2) dietary supplements, 3) cleaning products, 4) health and exercise equipment, and 5) small kitchen appliances.
International practices only set restrictions within the following categories: restricted goods (e.g., firearms, prescription drugs), perishable goods (e.g., foods, fresh produce), goods whose value cannot be easily determined by the average consumer (e.g., gemstones, investment packages), and bulk commodities (e.g., metals, crops). Other than in these specific categories, product approval for direct sales should be consistent with current regulatory requirements for all products across all retail industries.
Q. 6 How is organized the Sale of the products?
A. The Regulation on Direct Sales defines a direct selling company as any company that, in addition to selling products through stores, uses contracted salespersons to sell those manufactured products directly to end consumers. In other words, all product sales must ultimately happen in connection with retail stores—fixed establishments meeting certain requirements. Products cannot be sold out of an individual’s home or other similar location. The Regulation recommends that the direct selling company own the retail stores directly. If a direct selling company owns more than 10 stores in any Chinese province, the company can submit application to establish a provincial level branch company to help support its expanding operations.
All products sold through contracted salespersons must be made in China. A direct selling company cannot import foreign made products and sell them through its direct selling channels.
Another important aspect is that the price of all products sold to consumers must be published. The regulation will permit a retail price and salesperson price, but the price is not permitted to deviate greatly from the market average price of similar products of same category in same location during the same period of time.
Q. 7 How to recruit sales persons? And how to compensate them?
A. The Regulations state that the direct selling company will be held jointly liable for the activities of its salespeople. A salesperson must meet the following requirements:
· The salesperson for a direct selling company must have a salesperson certificate. To obtain the certificate, the salesperson must take and pass a national test prepared and administered by the government.
· The salesperson must sign a formal contract with the direct selling company. The contract must set out clearly the responsibilities and rights of both parties. Moreover, the contract must be pre-approved by the government.
· The salesperson must be from mainland China. The Regulations specify that foreigners who are non-company personnel are prohibited from engaging in any sales activities.
· The salesperson must be assigned to a company owned store or provincial level branch company.
· The salesperson must not sell product outside his or her assigned territory, or cross-boarder.
The current Regulation stipulates that direct sales agents can only be compensated based on personal sales and only up to 30 percent of personal sales volume (inclusive of commission, bonuses and all other economic benefits). Such restrictions seems to put direct sales companies in China at a disadvantage relative to businesses not categorized as direct sales, as the latter are free to use any incentives to stimulate sales and motivate employees.
Q. 8 Is Recruiting and Training permitted?
A. Yes. Article 13 of the Regulation on Direct Sales states that a direct selling company and its branches may recruit sales promoters. No entity or individual outside any direct selling company and its branches may recruit any sales promoter.
The Regulation (Art. 18) states also that a direct selling company shall make vocational training and examination on any sales promoter it recruits, and issue the certificate of sales promoter after the sales promoter has passed the examination. No one may undertake direct selling business without obtaining the certificate of sales promoter.
No direct selling company may charge any fees for making vocational training and examination on sales promoters.
No entity or individual outside a direct selling company may organize vocational training on sales promoters in any name.
In is also important to stress that the teaching staff who make vocational training on sales promoters shall be the formal employees of the direct selling companies, and shall comply with the following conditions:
1. Working in the companies for more than one year;
2. Having graduate or post-graduate education of higher education and the relevant professional knowledge of law and marketing;
3. Having no records of criminal punishment for intentional crimes; and
4. Having no records of major illegal operation.
A direct selling company shall issue the certificate of direct selling trainer to the teaching staff complying with the provisions in the preceding paragraph, and shall report the name lists of the personnel who have obtained the certificate of direct selling trainer to the competent department of commerce of the State Council for archival filing. The said department shall publicize the name lists of the personnel who have obtained the certificate of direct selling trainer on the government website.
Q. 9 Where reside the limits for legitimate direct sales?
In order to better define the limits of the legality of Direct Sales in China, the REGULATION ON PROHIBITION OF PYRAMID SELLING (i.e., Order of the State Council of the People's Republic of China , No. 444) was also introduced in 2005 (in effect as of November 2005). This regulation in particular prohibits the so called “pyramid selling’ which is defined in Art. 2 of this Regulation as follows:
The term "pyramid selling" as mentioned in this Regulation refers to such an act whereby an organizer or operator seeks for unlawful interests, disturbs the economic order and affects the social stability by recruiting persons, calculating and paying remunerations to recruiters on the basis of the number of persons a recruiter has directly or indirectly recruited or the sales performance, or asking the recruiters to pay a certain fee for obtaining the qualification for participation.
Under China's Regulations on Forbidding Pyramid Selling, parties who introduce, lure or force others to join in multi-level marketing shall have the relevant assets and illegal income confiscated and fined up to CNY500,000 and serious violators shall be punished by law.
Q. 10 When Direct sales is considered illegal in China?
Though Direct Sales is formally considered a legal activity in China, multi-level marketing in the form contemplated in the Regulation on PROHIBITION OF PYRAMID SELLING is prohibited because it is considered as an illegal activity.
This form of direct sales, multi-level marketing is considered an illegal activity when organizers or operators take in new members, calculate and pay salaries one member according to the number of new members who join in the multi-level marketing, introduced by one member directly or indirectly, or the sales performances. Or, the organizer asks new members to hand in a sum of money as a precondition to join in. Or, by means of developing new members, the organizer or the operator ask members to invite more people join in, forming a multi-level relationship. The salaries of members at certain level are based on the sales of members at a lower level. By this way, the organizer and the member at top level obtain interests illegally, disturbing normal economic order, and affecting social stability.
The great difference between the legal direct selling and multi-level marketing considered pyramid selling, according to the rules contained in these two Regulations resides in the fact that: all direct sellers are normally trained by the direct selling companies and any direct seller is not allowed to develop new followers or form multiple levels; the direct selling companies pay direct sellers salaries according to their sales; the total salary (includes wages, rewards, bonuses, or other economic benefits) of one direct seller should not exceed 30% of his sales. And no direct selling company may charge any fees for making vocational training and examination on sales promoters, otherwise it becomes an illegal activity.