30 June, 2015
Online data processing and transaction processing service falls into category I value-added telecom services (VATS). Under the Administrative Measures on Foreign Invested Telecom Enterprises as published and amended by the State Council in 2008 ("2008 Measures"), foreign ownership in a VATS company is capped at 50%. However, in practice MIIT has been extremely reluctant to grant VATS licenses to companies with foreign ownership and so far only a handful of foreign-owned companies have obtained VATS licenses.
In January 2014 MIIT first eased the foreign ownership restriction on online data processing and transaction processing service in the China (Shanghai) Pilot Free Trade Zone ("Shanghai FTZ") by increasing the 50% cap to 55%. In January 2015 MIIT abolished the foreign ownership restriction as a whole in the Shanghai FTZ. In the Catalogue of Industries for Guiding Foreign Investment published in March 2015, E-commerce is expressly exempted from the 50% foreign ownership restriction on VATS. In May 2015, the State Council published its official opinion to promote development of E-commerce, under which MIIT is charged with the responsibility of, among other things, removing the restriction on foreign ownership of E-commerce companies.
Key Features Of Circular 196
- Removal Of Restriction On Foreign Ownership
Foreign investors are permitted to own up to 100% equity of companies engaged in "online data processing and transaction processing service (for-profit E-commerce)". MIIT exercises the power delegated to it under the 2008 Measures to adjust the permitted foreign ownership ratio pursuant to applicable rules.
- Approval Criteria And Application Procedures Still Subject To The 2008 Measures
Despite the removal of foreign ownership restriction, other requirements laid down in the 2008 Measures are still applicable. In particular, the 2008 Measures require VATS companies to have a registered capital of RMB 10 million (for cross-region service) or 1 million (for single-region service) and the foreign investor to have "good credentials and operational experience in operating VATS".
- Given the favourable opinion of the State Council towards opening up E-commerce industry to foreign investors and clear instruction to MIIT to lift the restriction on foreign ownership, we are optimistic that MIIT would take measures to implement Circular 196 in practice. However, MIIT has yet to publish specific guidelines to local communication authorities or to the public as to the implementation of the new measures, and as a result the immediate effect of Circular 196 on foreign investment in E-commerce remains to be seen.
- The requirement that foreign investors have credentials and operational experience in running VATS means that foreign investors should be cautious in selecting the holding entity of the a proposed Chinese E-commerce subsidiary in order to meet the approval criteria. Companies without substantial operation may not be able to qualify under the 2008 Measures. Prior communication with MIIT would be essential for foreign investors planning to establish an E-commerce subsidiary in China.
- Circular 196 renders it possible for foreign-owned entity established under the VIE structure to obtain VATS license for E-commerce, and removes one of the obstacles for VIE-structured E-commerce companies to list in China. However, foreign financial investors may not qualify under the 2008 Measures for lack of substantial VATS operation experience and therefore prevent the Chinese subsidiary from obtaining the VATS license.
- MIIT has not defined the concept of "E-Commerce" . The definition under the 2013 draft Telecom Services Catalogue may server as a reference, under which E-commerce is defined as a public platform service for transactions of goods and services. Hence, foreign investors intending to engage in E-commerce as defined in the foregoing would now be permitted to hold 100% equity in E-commerce companies, but the restrictions applicable to other categories of VATS are still intact.
- Most companies operating E-commerce business as defined in paragraph 4 above hold VATS license for information service, a category II VATS (often referred to as ICP license). This means (i) foreign investors of the E-commerce companies holding ICP licenses will not be able to increase their ownership over 50% in the company under Circular 196; and (ii) foreign investors seeking higher ownership proportion in Chinese E-commerce subsidiaries will have to cause their Chinese subsidiaries to apply for VATS licenses for online data processing and transaction processing service.
For further information, please contact:
Karen Ip, Partner, Herbert Smith Freehills
Damien Bailey, Partner, Herbert Smith Freehills
James Gong, Herbert Smith Freehills