On March 10, 2015, the National Development and Reform Commission and the Ministry of Commerce (the “MOFCOM”) jointly issued the Catalogue of Industries for Guiding Foreign Investment (2015 version) (the “2015 Catalogue”), which will become effective from April 10, 2015. In addition, the Catalogue of Industries for Guiding Foreign Investment (2011 version) issued in December 24, 2011 (the “2011 Catalogue”) will be repealed at the same date. In the internet culture category, which includes social networking sites, online audio/video, and online games etc., the 2015 Catalogue has continued the restriction and prohibition policies as before, and further clarifies that the provisions of internet publishing services is a prohibited industry for foreign investment.
In the internet culture industry, generally, an operator will establish its own website, applications or other online platforms to provide users with music, audio/video, text, games, and other works, or allow users to upload video, text, music and other works on its platform, e.g. Sina Weibo, Tencent Weibo, Youku, Xiami Music, Shanda Games, etc. Based on the current legal system in the telecommunications industry in China, the internet culture industry falls into the scope of internet information services (i.e. internet content provider, “ICP”) in value-added telecommunication services (“VATS”), therefore, the operator is required to obtain an ICP license or a VATS license covering ICP services issued by the Ministry of Industry and Information Technology or its local counterparts (collectively the “MIIT”). In addition, for certain content such as news, publishing, audio/video, culture products, the operator shall also be required to obtain the approval of the competent authorities, which mainly refers to the Ministry of Culture (the “MOC”) and the State Administration of Press, Publication, Radio, Film and Television, the “SAPPRFT”). In light of this, an internet culture operator is subject to the dual supervision from both the internet industry and the culture industry, and foreign investment in this industry will also be subject to the applicable restrictions in these two industries.Taking this into account, please find below our summary on the foreign investment policies in the internet culture industry on the basis of the 2011 and 2015 Catalogues and other relevant regulations:
I. ICP Service
In the 2015 Catalogue, foreign investment in VATS shall be subject to restrictions on the level of shareholding permitted to be held by foreign investors, i.e. foreign shareholders may not have a shareholding in excess of 50%, with the exception of E-commerce. Therefore, foreign investment in ICP services is also subject to this 50% restriction on shareholding by foreign investors. The 2011 Catalogue contains almost exactly the same provisions on VATS as the 2015 Catalogue, however, the latter cancels the shareholding restrictions on E-commerce, which in fact will not substantially affect the internet culture industry.
II. Internet Culture Content Service
1. News Website
Under both of the 2011 and 2015 Catalogues, news websites are a prohibited industry for foreign investment, which is consistent with the Provisions on the Administration of Internet News Information Service (互联网新闻信息服务管理规 定, the “Internet News Provisions”). Pursuant to the Internet News Provisions, “news information” refers to news information on current affairs and politics including the relevant reports and comments on politics, the economy, military affairs, diplomacy, and other public affairs, as well as relevant reports and comments on public emergencies. We understand that such news information is considered to be too sensitive for foreign investment, therefore it is relatively reasonable to list it as a prohibited industry.
2. Internet Audio/Video Service
In relation to internet audio/video services, both of the 2015 and 2011 Catalogues list this as a prohibited industry. In addition, pursuant to the Provisions on the Administration of Internet Audio and Video Program Services (互联网视听节目服 务管理规定 , the “Internet Audio/video Provisions”) issued in 2007, network audio/video service providers should in general be state-owned or state-controlled enterprises with the exception of certain audio/video service provider existing before 2007. In a further notice, the SAPPRFT provides that applicants for internet audio/video service shall include enterprises controlled by the state but excluding foreign-invested enterprises, unless the operator which is not owned or controlled by the state has engaged in such services before the issuance of the Internet Audio/video Provisions. The 2015 Catalogue continues the same prohibition policy with the provision in the 2011 Catalogue.
3. Internet Publishing Service
Compared to the 2011 Catalogue, the 2015 Catalogue adds an additional prohibited industry, i.e. internet publishing services, in the culture industry. Pursuant to the Interim Provisions on Administration of Internet Publishing (互联网出版 管理暂行规定 , the “Internet Publishing Provisions”) issued in 2002, internet publishing refers to online dissemination activities where an internet information provider publishes on the internet or sends to end-users client via the internet those selected, edited and processed works, in particular, books, newspapers, audio/video, journals and other publications, created by itself or other for browsing, reading, use or download by the general public. That is to say, foreign investors are prohibited from engaging in publishing or sending such works via the internet.
Please note that, pursuant to the Notice on Further Strengthening of the Administration of Prior Approval of Online Games and the Approval of Imported Online Games (关于贯彻落实国务院 《“三定”规定》和中央编办有关解释，进一步加强 网络游戏前置审批和进口网络游戏审批管理的通 知, the “Online Games Notice”), offering online games to the general public for online interactive playing or download via the internet is considered to be online game publishing activity, therefore, it is also prohibited for foreign investor to engage in the operation of online games. The Online Games Notice explicitly prohibits foreign investment in online games, either in the form of a wholly foreign-owned enterprise, Sino-foreign joint venture or Sino-foreign joint cooperation enterprise, or via indirectly controlling or participating in the online game services operated by domestic companies, including: (i) establishing other joint ventures, signing certain agreements or providing technical support; or (ii) import user registration, account management and consumption of virtual currency into the online game networks or platforms over which they have actual control or ownership.
Although in 2005, the Opinions on the Introduction of Foreign Capital into Cultural Industry (关于文化领域引进外资的若干意见) noted the prohibition on foreign investment in internet publishing service, the 2011 Catalogue has not included it into the list of prohibited industries. The 2015 Catalogue stipulates internet publishing services as a prohibited industry, which reflects the trend of tightening supervision on the internet culture industry.
III. Internet Culture Operation
As with the 2011 Catalogue, the 2015 Catalogue specifies internet culture operations as a prohibited industry for foreign investment, with the exception of online music. Pursuant to the Interim Provisions on the Administration of Internet Culture ( 互联网文化管理暂行规定 , “Internet Culture Provisions”), internet culture products mainly include: (i) products specifically produced for internet, such as online music and entertainment, online games, online performance plays (programs), online performances, online works of art and web animation; and (ii) traditional cultural products such as music and entertainment, games, performance plays (programs), performances, works of art and animation that are produced or reproduced using technical means and disseminated via the internet. Based on the Internet Culture Provisions, foreign investors are prohibited from participating in the producing, reproducing, importing, issuing, and other operations of theabove internet culture products. In practice, though the 2011 and 2015 Catalogues have excluded online music from the prohibited scope, the MOC has not yet opened this area to foreign investors, except for Hong Kong and Macao investors under the arrangement of CEPA.
Comment:
Under the 2015 Catalogue, foreign investment in the internet culture industry will still be subject to: (1) 50% shareholding restrictions in VATS (except for E-commerce); and (2) prohibition on news website, internet publishing service, internet audio/video service, internet culture operation. Notwithstanding the above, in the event that a foreign investor proposes to engage in internet culture services without involving news, publishing, audio/video, culture and other content subject to special supervision (including pharmaceutical, medical and healthcare information, medical device, education), it may have the opportunity to invest in China by establishing a sino-foreign joint venture in which it has less than 50% ownership.
As to foreign investment in the internet culture industry through variable interest entity structure (“VIE”) , the MOFCOM noted several directions by which to handle the existing VIE for discussion when announcing the draft of the Foreign Investment Law of the People’s Republic of China on January 19, 2015. Among these directions, the existing VIE structures actually controlled by Chinese investors, may be justified in the future; however, those actually controlled by foreign investors, may yet have the chance to survive if it obtains the permit for foreign investment later. However, it is still uncertain whether the relevant authorities will issue such permits for foreign investment in prohibited industries through VIE structure.
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