China: China Ministry of Information Industry Notice Signals Greater Scrutiny of Internet and Telecom Service Firms

Last Updated: 8 August 2006

Article by Xiaohu Ma, Steven L. Toronto & Charles C. Comey

The PRC Ministry of Information Industry (MII) promulgated new rules on July 13, 2006 which impose significant new requirements on foreign-invested internet and telecom service businesses and signal a policy shift toward greater scrutiny of companies operating in this area.

The "Notice Regarding Strengthening Administration of Foreign Investment in Operation of Value-added Telecommunication Businesses," which became publicly available on July 27, presents significant issues for foreign-invested internet and other companies offering value-added telecom services. To date these companies have relied on contractual mechanisms to conduct business through onshore affiliates that hold the value-added telecommunications (VAT) license which is in turn required to conduct internet content-related business in China. The Notice marks greater scrutiny of such arrangements.

It should be emphasized that the Notice was promulgated only recently, and the precise scope of its implementation remains unclear. What is clear, however, is that the Notice by its terms imposes significant new requirements, and in this sense marks a new chapter in China’s regulation of internet-related companies:

  • New applications for VAT licenses from companies which fail to comply with the new rules can be denied by MII.
  • Existing firms (a number of which are already public listed on Nasdaq and other foreign markets) which already hold VAT licenses must conduct "self-examination" and report to appropriate provincial or municipal counterparts of MII by November 1.
  • Onshore entities which hold VAT licenses, or their shareholders, must also own related domain names and trademarks.
  • Firms which are deemed not in compliance with the new rules may have their ICP licenses revoked and withdrawn.
  • Companies seeking to list an overseas exchanges must obtain pre-approval from MII.

Set forth below are the main points of this new rule.

1. Foreign investors investing and operating foreign-invested telecommunication enterprises in China in accordance with applicable regulations should make application for establishment of such enterprises and for the related telecommunication enterprise business license. Foreign investors who illegally establish foreign-invested telecommunication enterprises within China and obtain telecommunication enterprise business licenses shall not be permitted to operated such enterprises.

2. Domestic telecommunication companies shall not in any form covertly lease, transfer, or sell, the telecommunication business permit to a foreign investor, or in any form covertly provide resources, premises or facilities to a foreign investor for purposes of illegally operating a telecommunication business in China.

3. Domestic telecommunication companies must go through the review and approval process with MII and obtain such approval according to relevant regulations before listing on a foreign stock exchange.

4. The Internet domain name and registered trademark must be owned by the relevant VAT business operator under the name of the company (including a shareholder of the company). The applicant for VAT business must have the requisite premises and facilities which should be set up within the scope of area covered by the relevant VAT business permit and be suitable for its approved VAT business.

5. With respect to those companies having VAT business permit, the Bureaus of Information Industry at the provincial, autonomous region and centrally-governed municipality level shall organize them to conduct self-inspection in accordance with the above requirements and shall review the results of such self-inspection. With respect to those companies to which customers pay close attention, greater review and inspection shall be carried out. Any noncompliance must be corrected within specified period of time. If no correction is made within such period of time, the Bureaus of Information Industry may withdraw the VAT permit. Please report any question to this Ministry in a timely manner during this process and the review and examination result shall be reported to us by November 1, 2006.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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