New Chapter For Foreign Telecom Purchase Of Shanghai Free Trade Zone

New Chapter For Foreign Telecom Purchase Of Shanghai Free Trade Zone

 

New Chapter For Foreign Telecom Purchase Of Shanghai Free Trade Zone

The telecom industry has typically been highly controlled and restricted when it comes to foreign purchase of China. China tightly controls what kinds of telecom business including fundamental telecom services (BTS) and cost-added telecom services (VATS) are open for foreign investment. China hasn’t yet permitted foreign purchase of BTS, but has already established three kinds of VATS open for foreign investment including: information services, store and forward services, as well as on-line information systems and transaction processing services pursuant to the WTO commitments.

However, the nation’s telecom rules have enforced a 50% foreign equity possession cap on VATS. What this means is, foreign investors cannot generate a wholly owned subsidiary (WFOE), but have to get a Chinese partner to setup a 50/50 partnership (JV) for participating in VATS companies. Regardless of the route of JV offered underneath the national rules, used it’s been very difficult to get the VATS license in the Secretary of state for Industry and knowledge Technology (MIIT) for really creating a JV2 . It has brought many foreign investors to consider the so-known as VIE structure for operating a VATS business in China.

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The telecom industry has traditionally been highly regulated and restricted in terms of foreign
investment in China. China tightly controls what types of telecom business including basic
telecom services (BTS) and value-added telecom services (VATS) are open for foreign
investment. China has not yet allowed foreign investment in BTS, but has had three types of
VATS open for foreign investment including: information services, store and forward
services, and on-line data processing and transaction processing services pursuant to its WTO
commitments
1
.

However, the national telecom regulations have imposed a 50% foreign equity ownership cap
on VATS. This means, foreign investors cannot set up a wholly owned subsidiary (WFOE),
but must find a Chinese partner to set up a 50/50 joint venture (JV) for engaging in VATS
businesses. Despite the route of JV offered under the national regulations, in practice it has
been extremely difficult to obtain the VATS license from the Ministry of Industry and
Information Technology (MIIT) for actually establishing a JV
2
. This has led many foreign
investors to adopt the so-called VIE structure for operating a VATS business in China.

With the launch of the Shanghai Free Trade Zone (FTZ) in September 2013, for promoting
the FTZ, China has opened additional VATS businesses for foreign investment and lifted the
foreign equity ownership cap concerning some VATS businesses in the FTZ. We highlight
below the key points of interest under the recently issued FTZ telecom rules
3
.

1
Additionally, China has allowed WFOE in offshore call centers on a pilot basis in 21 pilot cities since 2010.
Also, Hong Kong and Macau investors may invest in additional types of VATS business under CEPAs.

2
According to the statistics published by MIIT, as of March 31, 2014, of the more than 2,600 companies
holding VATS licenses issued by MIIT or its local counterparts, only about 30 more are JVs, or roughly about
1.2% of the total licensed telecom companies.

3
MIIT and the Shanghai People’s Government jointly issued the Opinions on Further Opening-up of Value-
added Telecommunications Services for Foreign Investment in Shanghai Pilot Free Trade Zone on January 6,
Additional VATS Businesses Opened for Foreign Investment

 Call center services (呼叫中心业务)
 Domestic multi-party communications services (国内多方通信服务业务)
 Internet access services (因特网接入服务业务)
 Domestic internet virtual private network services (VPN) services (国内因特网虚拟专用
网业务)

Higher Foreign Equity Ownership Allowed

For VATS businesses opened for foreign investment in FTZ, the foreign equity ownership
cap in the following specifically named categories of VATS business is either raised to 55%
or lifted completely:

 WFOE Allowed (that is, no cap on foreign equity ownership)

o App stores under information services (信息服务中的应用商店)
o Store and forward services (存储转发类业务)
o Call center services (呼叫中心业务)
o Internet access services (因特网接入服务业务) (Note: limited to serving
users within the FTZ)
o Domestic multi-party communications services (国内多方通信服务业务)

 55% Foreign Controlled JV Allowed (that is, the foreign equity ownership cap is
increased from 50% under the national telecom regulations to 55% in FTZ)

o E-commerce business under on-line data processing and transaction
processing services (在线数据处理与交易处理业务中的经营类电子商务)

2014, and then the Administrative Measures for Pilot Operation of Foreign Investment in Value-added
Telecommunications Business in Shanghai Free Trade Zone on April 15, 2014.

Relaxed Approval Requirements

The VATS license can be issued by the Shanghai Communications Administration (SCA)
without going through MIIT, which can significantly save the approval time.
Correspondingly, the sanction authority in FTZ is also delegated to SCA.

The minimum registered capital for foreign invested telecom companies is universally set at
RMB 1 million (approximately USD 167,000), compared to the national telecom regulations
where a minimum registered capital of RMB 10 million (approximately USD 1.67 million) is
required for carrying out cross-province telecom business.

COMMENTS

Overall, the FTZ telecom rules have opened a new door for foreign investors to incorporate a
WFOE or a 55% foreign majority JV in the FTZ for carrying out the specifically named
VATS business, whilst still being able to reach users nationwide (except for the internet
access services).

This relaxation in the FTZ may have given greater expectation around further general
relaxation on foreign investment in the telecom industry. However, to the contrary, we even
expect some kind of tightened control in the immediate future. The recent establishment of
two task forces at the central level (the Committee on National Security and the Central
Internet Security and Informatization Leading Group) has signaled that China is going to pay
increasing attention to internet security. In such an atmosphere, any further opening for
foreign investment in telecom business nationwide would not be realistic. This therefore
would make FTZ a more attractive area for foreign investors to tap into the Chinese VATS
market.

When considering the VATS investment in the FTZ, it’s important to remember that under
the FTZ rules, a company must first incorporate a company in the FTZ without a VATS
business scope, and then apply to the SCA separately for the VATS license. Once the VATS
license is issued, the company is required to go back to the business registration authority to
amend its business license for incorporating the licensed VATS business. Therefore, in
theory, there is a risk that if the VATS license was not granted by the SCA, the foreign
investor would be stuck with a WFOE or JV in the FTZ, which is not qualified to carry out
the VATS business. To minimize such risk, potential investors shall consider sufficient
advance consultation with the SCA before incorporating any company.

For further information, please contact:
Daniel Chan, Partner: [email protected]
Peng Tao, Of Counsel: [email protected]
Peter Chen, Senior Legal and Tax Manager: [email protected]
Zipo Lai, Associate: [email protected]

This publication is intended as a general overview and discussion of the subjects dealt with. They are not legal advice, and should not
be used as a substitute for taking legal advice in any specific situation. DLA Piper will accept no responsibility for any actions taken or
not taken on the basis of this publication.
If you have finished with this document, please pass it on to other interested parties or recycle it, thank you.
www.dlapiper.com
DLA Piper Hong Kong is part of DLA Piper, a global law firm operating through various separate and distinct legal entities. Further
details of these entities can be found at www.dlapiper.com.

Copyright © 2014 DLA Piper. All rights reserved.

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