On 15 April 2014, the Ministry of Industry and Information Technology ("MIIT") issued the much anticipated Administrative Measures for the Pilot Operation of Value-added Telecommunications Business by Foreign Invested Enterprises in China (Shanghai) Pilot Free Trade Zone ("Measures), which provide the requirements and application process regarding foreign investment in the China (Shanghai) Pilot Free-Trade Zone ("FTZ"). The Measures provide preliminary answers to various areas of speculation and questioning in respect of foreign investment in the value-added telecommunications services, or VATS, sector in the FTZ.
Applicable Laws and Regulations
On 27 September 2013, the State Council issued the Overall Plan for the China (Shanghai) Free Trade Pilot Zone ("Plan"), providing that the VATS sector in the FTZ will be open to foreign investment. Soon after, on 6 January 2014, the MIIT and the Shanghai municipal government jointly issued the Opinions of the Ministry of Industry and Information Technology and Shanghai Municipal People's Government on Further Opening up Value-added Telecommunication Business to Foreign Investment in China (Shanghai) Pilot Free Trade Zone("Opinion"). As of today, the relevant laws and regulations specific to foreign investment in the FTZ include the Plan, the Opinion and the Measures. The Opinion expressly states that theAdministrative Provisions on Foreign-invested Telecommunications Enterprises, which governs foreign investment in Telecommunications businesses throughout the rest of China, does not apply to VATS businesses in the FTZ.
The barriers to entry for foreign investment in value-added telecommunications businesses in the FTZ provided under the Measures have been relaxed. In particular, the six main entry requirements are as follows:
- the operator must be a lawfully established company in the FTZ;
- the operator must have capital and professional staff commensurate with its business operations;
- the operator must have credibility or ability to provide long-term services to its users;
- the operator must have registered capital of at least RMB 1 million;
- the operator must have the necessary venue, facilities, technology, and interest and information safety mechanisms and measures. In particular, the service facilities must be located in the FTZ; and
- the operator, its main investors and management personnel, must have no record of breaching any provision of the telecommunications laws and regulations over the past three years.
Foreign Equity Share Restrictions Relaxed for Certain Categories
According to the Opinion, restrictions on foreign investment will be significantly relaxed in certain VATS categories as below.
- Information services and storage and forwarding services, which is currently open to foreign investment so long as foreign equity share does not exceed 50%, may now receive foreign investment exceeding the 50% limit on a pilot basis. Information services under this provision only include app stores.
- Call center services, domestic multi-party communications services, Internet access services (provision of Internet access service to Internet users), and domestic Internet VPN services have also been opened up. Foreign equity share in call center services, domestic multi-party communications services, Internet access services (provision of Internet access service to Internet users) may exceed 50%, and foreign equity share in domestic Internet VPN services shall not exceed 50%.
- Foreign equity share in online data processing and transaction processing services (operational electronic commerce) shall not exceed 55%.
In addition, the Opinion clearly states, for the first time, that except for Internet access services, all other value-added telecommunications services aforementioned may be provided throughout the whole nation, from a facility in the FTZ.
Simplification of Approval Process
The Measures clearly state that the review and approval authority for engaging in VATS business has been delegated from the MIIT to the Shanghai Communications Administration and require that the Shanghai Communications Administration make a decision within two months after an application has been accepted, shortening the time required for obtaining an approval.
According to the Administrative Provisions on Foreign-invested Telecommunications Enterprises, the application process for approval includes, but is not necessarily limited to, two distinct MIIT approvals, i.e., the application for (i) the Examination Decision on Foreign Investment in Telecommunications, and (ii) the Telecommunications Business Operating License. Such application process takes approximately 5 months. In marked contrast to above burdensome approval process, the Measures has simplified and merged the approval to further encourage foreign investment in value-added telecommunications business in the FTZ.
Duration of the Pilot Scheme
According to the Plan, the term of the pilot scheme is fixed for a period of three years, subject to further adjustment by the State Council from time to time.
While the PRC telecommunications sector continues to develop, many uncertainties linger as the PRC government experiments with different new policies in regulating foreign investments in this sector that are still subject to adjustments. As such, the current trend seems to indicate that restrictions will be relaxed and more detailed policies in respect of implementation mechanisms will be forthcoming.
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