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China – Opening-Up Policies Of Value-Added Telecom Services In Shanghai Free Trade Zone.

8 May, 2014

 

 

Release of Pilot Measures enables the Incorporation of Foreign-invested Telecom Enterprises in the FTZ

 

Following a framework regulation1 regarding the opening-up of value-added telecom services (“VATS”) for foreign investments in Shanghai Free Trade Zone (“FTZ”) issued by the Ministry of Industry and Information Technology (“MIIT”) on January 6, 2014 (the “Opening-up Opinion”)2, MIIT finally issued long-awaited implementing guidance on April 15, 2014, titled, “Pilot Measures of Foreign-invested Value-added Telecom Services within the China (Shanghai) Pilot Free Trade Zone(the “Pilot Measures”). 


The Opening-up Opinion has liberalized seven VATS sectors to foreign investors with five of them released for full foreign ownership, while kept silent on implementation-level provisions, such as, the qualifying criteria for a foreign investor to set up a foreign-invested enterprise (“FIE”) in the FTZ carrying out VATS business, and the related application/approval process that should be followed to apply for a VATS license. With the release of the Pilot Measures, a foreign investor should be able to initiate their actions to incorporate a foreign-invested telecom enterprise (“FITE”) and enter into the VATS sector through such entity.

 

I. Highlights


(1) Similar Qualifying Criteria With Increased Attention To Network Security And Personal Information Protection


The Pilot Measures lay out the qualifying criteria for a FIE registered in the FTZ to engage in the VATS business, which are similar as those under the Administrative Measures on Telecom Service Operation License (the “Telecom License Measures”), the regulation governing all the telecom service providers in China, and the Regulations on Administration of Foreign-invested Telecom Enterprises (the FITE Regulations”), the regulation governing all FITEs outside of the FTZ, with the following differences or additional requirements,
(i) Existing FIEs to apply for VATS license: The Pilot Measures clearly provide that an application of the VATS license should be made by an existing FIE registered in the FTZ; while under the FITE Regulations, the application could be made after the FIE is in place or in parallel with the FIE establishment process. 


(ii) Registered capital: Under the Telecom License Measures, the minimum requirement of the registered capital for a FITE should be RMB 1m for VATS provided within provincial region and RMB 10m for VATS provided nationwide. However, in the FTZ, the minimum amount of the registered capital for the FITE has dropped to RMB 1 million for VATS provided nationwide.


(iii) Network security and personal information protection: In addition to the qualifying criteria provided same as those under the Telecom License Measures and the FITE Regulations, the Pilot Measures emphasize that a VATS license holder in the FTZ must establish necessary network security and personal information protection safeguarding system and measures, which reflect the stress that the Chinese government has put on in recent years.


(iv) Facilities: Following the same provided in the Opening-up Opinion, the Pilot Measures continue to require the FITEs to base their service facilities in the FTZ. Nevertheless, in consideration of the technical complexity and increasing creation in the business model of VATS sector, we view that the scope of service facilities could be further discussed with the authorities where it is not entirely clear under a particular case. 


(v) Foreign investors’ relevant experience: The Pilot Measures do not lay down any requirements for the business background of the foreign investors. However, taking into account the provisions of the Opening-up Opinion as well as the fact that the relevant requirement on foreign investors under the FITE Regulations is still valid, we view that the foreign investors applying for the VATS license in the FTZ must have good track record and experience of running business in the VATS sector. 


(2) Simplified Approval Process With Delegation Of Approval Authority 


Compared with approval process under the FITE Regulation, it is encouraging under the Pilot Measures that the approval process for a VATS license has been simplified, with the delegation of approval authority from central level MIIT to its counterpart at Shanghai level. 


(i) Delegation of Approval Authority: Instead of MIIT, Shanghai Communications Administration (“SCA”), MIIT’s counterpart in Shanghai, will be responsible for review and approval of the VATS license application in the FTZ, even if the services in concern may be provided nationwide. Though the Pilot Measures require SCA to file with MIIT for projects it has approved at a later stage, the delegation of the approval authority will not only shorten the applicants’ waiting period but also facilitate the communication channel between the applicants and the approval authority. 


(ii) Simplified Approval Process: The system applicable for the VATS license application outside of the FTZ under the FITE Regulations establishes two-phase approval process, i.e. pre-approval phase from MIIT or its counterpart at provincial level and final approval phase from MIIT system after an applicant going through the approval and registration formalities with competent branch of Ministry of Commerce and Administration for Industry and Commerce. Under the Pilot Measures, the approval process has been simplified in one phase dealing with SCA only and accordingly, the time limit for the authority to review each application has been shortened from the previous 90 days at central level MIIT to 60 days at Shanghai level only. 


(3) “Pilot” VATS License With Annual Inspection System 


It is noticeable that the valid term of a VATS license issued to the FITE established in the FTZ will be temporarily fixed at 3 years. The Pilot Measures keep silent on what would happen or how to extend the term when the “pilot” 3-year period is expired.

 

Adopting the annual inspection system from the Telecom License Measures, the Pilot Measures require the FITEs in the FTZ to submit certain materials to SCA for an inspection on an annual basis in the first quarter of each year. Same as that under the Telecom License Measures, SCA will impose administrative sanctions to a FITE for any non-compliance of regulatory requirements exposed in the course of the annual inspection. Furthermore, SCA will publish the outcome of annual inspection and report same to the relevant Administration of Industry and Commerce.

 

II. Comments


The telecommunications sector has been highly regulated in China, and due to the sensitivity of this industry, foreign-funded market players have been restricted in this area for a long time. With the release of the Opening-up Opinion and the Pilot Measures, it is expected that China’s government will open its door in the VATS sector starting from the pilot program in the FTZ. 


The relaxation of the foreign equity ownership restriction and simplification of the approval procedures will not only facilitate the entry of foreign investors in the VATS market, but also render it possible for certain VATS businesses that have been run via outsourcing or Variable Interest Entity (VIE) structure to be operated lawfully and economically from now on. More encouragingly, the opening-up policies in the FTZ enable the foreign investors to provide services nationwide, through their FITEs established in the FTZ. 


Considering that the Opening-up Opinion and the Pilot Measures remain unclear at certain points, we will closely follow up the actual move and issuance of VATS licenses in the FTZ in next months, and further assess the implications and implementations of this “first-ever” opening-up policies.

 

End Notes:


1 The regulation is titled as “The Opinion on Further Opening-up of Value-added Telecom Services for Foreign Investment in the China (Shanghai) Pilot Free Trade Zone”.

2 For summary of and comment on the Opening-up Opinion, please refer to our legal bulletin titled “Further Opening-up of Value-added Telecommunications Services in the FTZ” released on January 13, 2014.

 

Jun He 4

 

For further information, please contact:

 

Ning Liu, Partner, Jun He

liun@junhe.com


Wei Chen, Partner, Jun He 

chenwei@junhe.com

 

Jun He International Trade Practice Profile in China

 

Homegrown International Trade Law Firms in China

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