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Commercial Franchising

On 6 February 2007, the State Council promulgated the Regulation on the Administration of Commercial Franchises (the Regulation) which became effective on 1 May. To ensure full implementation of the Regulation, the Ministry of Commerce issued the Administrative Measures on the Record Filing of Commercial Franchises and the Administrative Measures for Commercial Franchise Information Disclosure also on 1 May 2007. Revisions of these two administrative measures were successfully made through Order No. 5 [2011] and Order No. 2 [2012] of the Ministry of Commerce. The revised Administrative Measures on the Record Filing of Commercial Franchises and Administrative Measures for Commercial Franchise Information Disclosure came into force on 1 February 2012 and 1 April 2012 respectively.

Franchiser Admission System

Commercial franchises (hereinafter referred to as “franchises”) refers to a form of business operation whereby an enterprise (“franchiser”) possessing operation resources such as registered trademark, corporate logo, patent, patented technology etc grants other operators (“franchisees”) permission to use its operation resources by means of a contract, under which the franchisees operate according to the common operation model specified in the contract and pay the franchiser a franchise fee. Entities and individuals other than enterprises cannot act as a franchiser and engage in franchise operations. According to regulations, a franchiser must possess the following franchising qualifications:

  • A franchiser must be an enterprise, i.e., a profit-oriented operation entity with an independent accounting system. It may be a sole proprietorship, a limited company or a foreign-invested enterprise, but Hong Kong companies may not engage in franchising as an individually-owned business.
  • To engage in franchise operations, a franchiser must have a mature operation model and be able to provide franchisees with continuous operation guidance, technical support, business training and other services.
  • To engage in franchise operations, a franchiser must have at least two direct sales stores that have been operating for more than one year.

Franchiser Record Filing System

Franchises are subject to national network-based record filing. To engage in a franchise operation, it is not necessary to apply for a separate licence, but the franchiser has to apply for record filing with the competent commerce department within 15 days of initially signing a franchise contract with a franchisee. The franchiser should, before 31 March in each subsequent year, report to the filing authority the conclusion, cancellation, termination and renewal of the franchise contract in the previous year.

If the documents and materials submitted by a franchiser are incomplete, the filing authority may require the franchiser to submit additional documents and materials within seven days. The filing authority will handle the filing within 10 days of the date on which the materials of the franchiser are complete.

If there is a change in a franchiser’s business registration, in the information on business resources or in the distribution of stores of all franchisees within the territory of China, the franchiser should, within 30 days of the date on which the change occurs, apply for modification with the filing authority.

If a franchiser who has completed record filing falls under any of the following circumstances, the filing authority may cancel its record filing and make an announcement through its franchise information management system:

  • The franchiser cancels its business registration, or its business licence is revoked by the competent registration authority as a result of its illegal business operations.
  • The filing authority receives a judicial advice made by a judicial authority on the cancellation of record filing as a result of the franchiser’s illegal business operations.
  • The franchiser conceals relevant information or provides false information, resulting in major impacts.
  • The franchiser applies for the cancellation of record filing and obtains the consent of the filing authority.
  • Other circumstances that call for the cancellation of the record filing.

(a)  Filing Authority and Procedures

The Ministry of Commerce and the competent departments of the people’s governments of all provinces, autonomous regions and municipalities directly under the central government are authorities for franchise record filing. If franchise activities are carried out in any province, autonomous region or municipality directly under the central government, record filing should be made with the competent commerce department of the province, autonomous region or municipality directly under the central government where the franchiser is located. If franchise activities are carried out across provinces, autonomous regions and municipalities directly under the central government, record filing should be made with the Ministry of Commerce.

An enterprise engaging in franchise operations in a province, autonomous region or municipality directly under the central government should submit relevant supporting materials directly to the local provincial/municipal record filing authority in person (or by mail) to obtain a login ID and a password. After obtaining the login ID and password, the company should file a record by entering the management system of the China Commercial Franchise Network of the Ministry of Commerce.

(b)  Materials Required for Franchise Record Filing

A franchiser applying for record filing should submit the following materials to the filing authority:

  • Basic information regarding the franchise.
  • Information regarding the distribution of stores of all franchisees within China.
  • Market plan of the franchiser.
  • Business licence for enterprises with legal person status, or other certificates regarding legal status.
  • Registration certificates regarding the trademark rights, patent rights and other business resources relating to the franchise operations.
  • Certifying documents that are in compliance with Paragraph 2, Article 7 of the Regulation. (The provision of the above paragraph is not applicable to franchisers who had engaged in franchise activities before 1 May 2007 when application materials for franchise record filing are submitted.)
  • The first franchise contract concluded with a franchisee in China.
  • A sample franchise contract.
  • The contents of the franchise operation manual to be used (The number of pages in each chapter and the total number of pages of the manual have to be specified. If such a manual is provided through an internal network of the franchise system, the estimated number of printed pages has to be provided.)
  • For franchises of products and services requiring approval in accordance with the provisions of national laws and regulations, the approval documents of the relevant competent departments should be submitted.
  • Foreign-invested enterprises should submit the Approval Certificate for Foreign-invested Enterprises (Approval Certificate). The business scope of the Approval Certificate should include the item “Commercial activities are conducted through franchising”.
  • Commitment of the franchiser signed and stamped by its legal representative.
  • Other materials the filing authority deems necessary.

If any of the above documents is prepared outside of the People’s Republic of China, it should be notarised by a notary institution in the country in which it was prepared (with a Chinese translation attached) and be certified by the embassy or a consulate of the People’s Republic of China in the country, or undergo the certification procedures stipulated in the relevant treaty signed between the People’s Republic of China and the country. Documents prepared in Hong Kong, Macau and Taiwan should undergo the relevant certification procedures.

Franchiser Information Disclosure System

According to the Administrative Measures for Commercial Franchise Information Disclosure (2012 Revision), a franchiser should, at least 30 days prior to the conclusion of the franchise contract, provide in writing the information listed below to the franchisee except where the franchiser and the franchisee are renewing the original franchise contract on the same conditions:

  • Basic information on the franchiser and its franchising activities.
  • Basic information on the business resources held by the franchiser.
  • Basic information on franchising expenses.
  • Information on the prices and conditions of the products, services and equipment to be provided to franchisees.
  • Information on services to be provided continuously to franchisees.
  • The forms and contents of the guidance to and the supervision over the business operations of franchisees.
  • Information on the investment budget of franchising outlets.
  • Information on franchisees within the territory of China.
  • The summary of the financial and accounting statements and the summary of the audit reports of the franchiser in the past two years as audited by accounting firms or audit firms.
  • Information on franchise-related litigations and arbitrations involving the franchiser in the past five years, covering causes, litigation (arbitration) claims, jurisdiction and outcomes.
  • Information on records of major illegal business operations committed by the franchiser and its legal representative.
  • The text of the franchise contract.

A franchiser has the right to require a franchisee to sign a confidentiality agreement before disclosing information to the franchisee. A franchisee should not divulge or improperly use any trade secret that comes to its knowledge in the course of concluding a contract, regardless of whether the franchise contract is concluded or not. A franchisee will be liable for compensating the losses caused to the franchiser or other persons due to its divulgence or improper use of trade secrets in violation of regulations.

Content provided by Picture: HKTDC Research
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