What Does a Foreigner Need to Open a Restaurant/Café in China?

[dropcap]T[/dropcap]he largest in the world, China’s foodservice market offers many exciting opportunities for food and savvy businesses, but foreigners can be daunted by the bureaucratic process of establishing a business in China.

1. Finding the Right Location

The first step for the business is to find the location for the food and beverage operation. This can be particularly tricky because the investor needs to lease the location before the registration process starts. To avoid renting locations that will lead to business registration denial, investors should take extra precautions to find a business location that can pass inspections. It is often possible to ask for consultations from the Environmental Protection Bureau, Hygiene Bureau, the local department of the Ministry of Commerce, and the Administration of Industry and Commerce (AIC) to verify requirements, like whether the location will be able to obtain a license for the disposal of waste water.

It is often safer to find a location currently used as a food and beverage operation. That will require the investor to pay a transfer fee to the current leaser. The fee will vary by location, but it is usually at least RMB 100,000 (around 14.000 eur). If investors choose a space not previously used as a food and beverage operation, they will need to remodel it to make sure it passes inspections. This option can be riskier, and costly – redecoration companies tend to charge a service fee of around RMB 10,000 per sq. meter (1.400 eur/m2), on top of the costs of materials. If residents in the chosen area find the food and beverage operation disruptive, the business license can be revoked.

2. Licensing and Registration of the Food Business

Company Name Registration

Before applying for any licenses and permits, it is necessary to register the business name at the local AIC. The AIC will issue a “Notice of Company Name Reservation” making sure that the company name has not previously been used anywhere else in the province.

Health and Food Hygiene Licenses

After obtaining a company business license, investors face the task of health and food safety inspections. For businesses involved in the food and beverage industry in China, there are three main types of food and beverage licenses, and some may require more than one license depending on the scope of their food and beverage business operation:

– A Catering License is required for catering service providers, both individuals and organizations, that are involved in the provision of group meals (food stalls and providers of semi-finished food products are not required to carry this license). If an entity provides catering services in different locations, it must apply for a license for each location.

– A Food Production License is required to ensure that businesses comply with manufacturing standards and environmental regulations. All staff involved in food service must undergo training approved by the China Food and Drug Administration (CFDA), and there should be a health management system in place to ensure the health and hygiene of personnel. The state-level General Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) is responsible for the nationwide administration of the food production license.

– A Food Distribution License is required for businesses engaging in the sale of food items and is administered by the AIC. Any entity, both individuals and organizations, involved in food distribution (including retail and the wholesale distribution of pre-packaged food and bulk food) is required to acquire a Food Distribution license. However, sometimes when an entity holding a food production license sells food products on the premises of production, it can get around the requirement to have a food distribution license.

Alcohol Permit Registration

Food and beverage operations serving alcohol, need an alcohol permit. The alcohol permit will be issued after the business license. Tax registration permits and food licenses are also required. In the application for the health and food hygiene license, you need to state the intention to sell alcohol.

Environmental Protections Approval

Before any catering service can begin operating, it must get approval from the local Environmental Protection Bureau. That will include an evaluation of the indoor and outdoor surroundings of the site to ensure that the location complies with standards listed in the Directory for the Management and Classification for Construction Items and Environmental Influence.

3. Establishing the WFOE or JV Entity

The steps for establishing the business entity will depend on how the food business is registered. In China, foreigners are not allowed to be the sole owners of the restaurant or food business, but they can open it as a limited-liability Whole Foreign-Owned Enterprise (WFOE) or through a Joint Venture (JV) with a Chinese citizen as a business partner. In addition, some foreign investors may choose to let the Chinese partner(s) open the business to simplify the registration process, but investors should be aware that this will not allow them to have any legal rights.

The Ministry of Commerce will approve the business project and issue an approval letter and a certificate to take to the AIC and register the company business license.

Risks and Challenges

Investors should be ready to battle China’s often volatile real estate market to develop their business operation. While most restaurants in global cities like New York City and London operate on at least 10-year leases, leases for food and beverage operations in China are often five-year leases, some even just three years. In addition, restaurant owners in top-tier cities like Shanghai pay a larger percentage of their profits on business leasing than they would in other parts of the world. In a survey on restaurant leasing fees conducted by SmartShanghai, we learned that paying 15 percent of restaurant earnings on rent is the norm, with most restaurant owners paying between 10 percent and 20 percent on leasing. In contrast, restaurant owners in some of the world’s most expensive cities, like New York City, pay around 10 percent of their profits in rent. High rental costs can often be reasons why food and beverage businesses go out of business, especially in the beginning, when changes to business strategy sometimes have to be made.

In addition, after signing the lease, investors should be ready to spend at least 2 to 3 months to acquire all the required licenses and permits to open the food and beverage business. It is sometimes possible to negotiate with the landlord to have a rent-free period of 1 to 2 months after signing the lease, which will be helpful in case the investor encounters delays in obtaining all the appropriate licenses necessary to start operation.