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China – Study On Establishing Value-Added Telecommunication Service Foreign Invested Enterprises in China (Shanghai) Pilot Free Trade Zone.

28 May, 2014

 

 

I Trends In China (Shanghai) Pilot Free Trade Zone 


The “China (Shanghai) Pilot Free Trade Zone Foreign Investment in Value-Added Telecommunication Service Pilot Administrative Measures” (the “Pilot Measures”), officially promulgated on April 15, 2014, lays out the procedural guidelines for foreign investment in the value-added telecommunication services (“VATS”) sector in the China (Shanghai) Free Trade Zone (“FTZ”). This aspect attracted the attention of many foreign investors, each considering how to route through the FTZ to set up a foreign controlled entity in the value-added telecommunications field. On the other hand, it also prompted FTZ government authorities to show a more positive, welcoming attitude towards foreign invested VATS enterprises, with hope that the Pilot Measures will be implemented in practice as soon as possible and thereby being used a model that can be replicated and popularized outside of the FTZ. 


Nonetheless, because the Pilot Measures was a single-department rule promulgated only by the Ministry of Industry and Information Technology (“MIIT”) rather than a catch-all regulation jointly issued by all relevant authorities on this matter, it is mostly focused from a perspective of how foreign invested enterprises can obtain the “China (Shanghai) Pilot Free Trade Zone Foreign Investment Value-Added Telecommunication Service Pilot Approval” (“VATS Approval”). However, the Pilot Measures has not directly resolved the following puzzle: which governmental procedures must be completed to establish a new foreign invested VATS enterprise besidethe VATS Approval? Should a pre-establishment approval approach or a record-filing approach be used to initiate the establishment process? And how these steps should be prioritized in the process? This study will use the call center business as an example, to look at the general process of establishing foreign invested VATS enterprises in FTZ from both regulatory and practical prospective. 


II Study Of The Establishment Process 


(1) “Negative Lists” Approach And Pre-establishment Approval Approach 


According to the “China (Shanghai) Pilot Free Trade Zone Foreign Invested Enterprise Record Filing Administrative Measures”, promulgated by the Shanghai Municipal Government on September 29, 2013, and the “China (Shanghai)Pilot Free Trade Zone Enterprise Registration Administration Rules” (the “Registration Rules”) promulgated by the Shanghai Administration for Industry and Commerce on September 30, 2013, the simplified “record-filing” treatment for foreign invested enterprises (i.e. make filing with the registration authority for company establishment, then register with the MOFCOM authority afterwards) are only available to companies in those industry sectors beyond the “Foreign Investment Access Special Administration Measures List” (the “Negative List”). While the establishment of foreign invested enterprises in sectors under the negative list shall still follow the traditional “pre-establishment approval” approach.


The VATS, as a main industry category, is covered on the Negative List (see Negative List category I). According to our consultations with relevant FTZ government officials, call center business, although not specifically listed, shall also be covered on the Negative List. Hence, after completing the name reservation (which takes approximately 5 days), foreign investor seeking to establish call center companies shall first apply for the approval for establishment from the FTZ Management Committee (which takes approximately 20 days), then apply for registration with the FTZ Administration of Industry and Commerce (“AIC”) to obtain the business license (which takes approximately 10 days). 


(2) “Post-Business License Approval” System in Practice 


The “Several Supporting Opinions on the China (Shanghai) Pilot Free Trade Zone by the State Administration for Industry and Commerce” (the Supporting Opinions”) promulgated by the State Administration for Industry and Commerce on September 26, 2013, divided all foreign invested companies into two categories – those involving approval and those do not (see Article 1, paragraph 2 and Article 7 of the Registration Rules). The latter may engage in business activities as soon as the business license is obtained, whereas, no business activities can be carried out for the former unless it obtains all relevant approvals. Further, such approvals shall be divided into “pre-establishment” approvals and other approvals. “Pre-establishment” approvals are required to be obtained before the company applies for a business license with the company registrar, while, the other approvals are not subject to such requirements. Therefore, the so-called “Post-Business License Approval” approach is only applicable for the other approvals. 


Although the Pilot Measures did not explicitly say that foreign invested VATS enterprise shall follow the “Post-Business License Approval” approach, Article 4 of the Pilot Measures provides that companies applying for the VATS Approval in the FTZ shall submit to Shanghai Municipal Communication Administration Bureau (“Shanghai MIIT”) its business licenses in the application package. This essentially means that in practice, Shanghai MIIT is adopting the “Post-Business License Approval” approach for the VATS Approval. 


Nevertheless, a more practical question would be raised, which is not answered in the Pilot Measures: can the business license list VATS in the company’s business scope before the VATS Approval has been issued? Or, can the new company apply for a business license first, of which the business scope does not cover VATS (such as the pure consulting services business scope), and amend the business scope to add VATS, once the VATS approval is issued by Shanghai MIIT? Using the call center business as an example – according to the FTZ officials, in practice the Shanghai MIIT allows call center companies to, prior to applying for VATS Approval, include “call center” in the business scope, for the purpose of avoiding the trouble of making amendments in the future.

 

(3) Exceptions to the Registered Capital Subscription System 


Pursuant to the Supporting Opinions, unless laws and administrative regulations otherwise specify requirements for registered capital, all FTZ companies shall use the capital subscription regime (as opposed to the fully-paid registered capital regime). Based on the “Decision of the State Council on Temporarily Adjusting the Administrative Examination and Approval Items or Special Access Management Measures Prescribed by Certain Administrative Regulations and State Council Documents in the China (Shanghai) Pilot Free Trade Zone”, the “Ministry of Industry and Information Technology and the Shanghai Municipal People’s Government’s Opinions on Further Opening Up of China (Shanghai) Pilot Free Trade Zone Value-Added Telecommunication Services” (the “Opening Up Opinions”) suspended the effect of certain provisions of the “Provisions on the Administration of Foreign-Invested Telecom Enterprises” in FTZ1. As such, Article 3 of the Pilot Measures further provides that the minimum registered capital of all foreign invested VATS enterprises shall be RMB 1m. Using the call center business as an example – according to FTZ officials, Shanghai MIIT, in practice, requires the investors of the VATS companies to inject at least RMB 1m registered capital before applying for the VATS Approval, to demonstrate that the company has met the minimum registered capital requirement. Therefore, the establishment of foreign invested VATS enterprises will typically also entail, after obtaining the business license and before applying for the VATS Approval: applying for the foreign exchange registration certificate (which takes approximately 2 days), opening a foreign exchange account and paying up the required minimum registered capital.


(4) Other Relevant Procedures 


Other than the three core licenses described above: the FTZ approval for establishment, business license, and VATS Approval – the establishment of foreign invested VATS enterprise also requires the completion of other procedures applicable to all foreign invested enterprises. In the absence of special treatment for FTZ companies, those formality requirements shall be equally applied to companies within and out of the FTZ. However, in practice, as we learned from the relevant FTZ government authorities, certain procedures have been simplified in the FTZ: (1) applications for Taxation Registration Certificate and Organization Code Certificate may be submitted simultaneously with the Enterprise Establishment Registration (i.e., the business license application), as the so-called “one-window acceptance”; and (2) the application for Financial Registration Certificate, the opening of basic bank account and taxation account can be processed simultaneously with the VATS Approval application. 


III Future Development 


(1) 2014 Edition Of The Negative List 


Reportedly, the governmental authorities have been deliberating on the 2014 edition of Negative List, and the new Negative List will probably further streamline the 2013 edition. It remain to be seen whether the 2014 edition of Negative List will exclude certain VATS sectors, to effect the change from the pre-establishment approval approach to the simplified record-filing approach for companies engaging in those businesses.

 

 

(2) Adjustments to the Telecommunication Service Industry Catalogue 


The Opening Up Opinions follows the classification of VATS sectors under the 2003 version of “Telecommunication Services Industry Catalogue”. We note that MIIT has already released the draft 2013 edition of Telecommunication Services Industry Cataloguefor public comments. This draft further adjusts the classification of VATS businesses, and more clearly and comprehensively defined the terms and scope of related businesses. Thus, it is noteworthy how the official 2013 edition of Telecommunication Services Industry Cataloguewill further affect the liberalization of VATS in the FTZ in the near future.

 

End Notes:


1 According to “Provisions on the Administration of Foreign-Invested Telecom Enterprises”, with respect to a foreign-invested telecom enterprise of which the operation is nationwide or covers more than one province, autonomous region, or municipality directly under the Central Government, its registered capital shall be at least RMB 1bn in the case of operating basic telecom services, or shall be at least RMB 10m in the case of operating value-added telecom services.

 

Jun He 4

 

For further information, please contact:

 

Ning Liu, Partner, Jun He

liun@junhe.com


Wei Chen, Partner, Jun He 

chenwei@junhe.com

 

Jing Cai, Jun He

caij@junhe.com 


Yu Cui, Jun He

cuiyu@junhe.com

 

Jun He International Trade Practice Profile in China

 

Homegrown International Trade Law Firms in China

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