United States: New Shanghai Free Trade Zone Policy: WFOEs Now Permitted To Provide E-Commerce Services

Last Updated: February 13 2015
Article by Adam W. Schorr, Joanna Jiang and Barry H. Genkin

Action Item: The Ministry of Industry and Information Technology of the People's Republic of China has announced that foreign investors may now hold 100 percent of the equity shares in e-commerce companies located in the Shanghai Free Trade Zone. This new policy permits foreigners to engage in the e-commerce business in China without having to joint venture with a Chinese partner.

In 2014, the Ministry of Industry and Information Technology ("MIIT") and the People's Government of Shanghai jointly issued a series of regulations to loosen restrictions on foreign investment in e-commerce businesses.1 Under these regulations, maximum foreign ownership in online processing and transaction processing businesses was raised from 50 percent to 55 percent in the Shanghai Free Trade Zone ("FTZ"), and the approval procedure for setting up e-commerce companies in the FTZ was simplified.

On January 13, 2015, the MIIT promulgated the Circular on Removing the Restrictions on the Foreign Shareholding in Online Processing and Transaction Processing (Operating E-commerce) Business in the China (Shanghai) Pilot Free Trade Zone, under which the MIIT announced that the restriction on the shareholdings of foreign investors in those companies engaging in the business of providing online data processing and transactions processing services in the FTZ has been removed, allowing foreign investors to hold 100 percent equity shares in such companies ("FTZ New Policy").

Pursuant to the Circular of the Ministry of Information Industry on the Readjustment of the Classification Catalogue of Telecommunication Services, which was issued by the MIIT and made effective April 1, 2003, online data processing and transaction processing services are defined as online data processing and transaction/affair processing services provided to users through communication networks, using various kinds of data and affair/transaction processing application platforms. Transaction processing services are further defined as a variety of banking services, stock trading, ticket transactions, sale of auction goods, electronic payments, etc. Based on this definition, the services provided by various well-known e-commerce operators, such as Taobao.com, yhd.com, and JD.com, are online data processing and transaction/affair processing services. Therefore, any foreign investor interested in engaging in a business similar to those provided by the aforementioned e-commerce operators is now permitted to set up a wholly-owned enterprise ("WFOE") in the FTZ to provide such services.

The FTZ New Policy enables foreign investors to establish a 100 percent foreign-owned company without joining with a Chinese partner. Although the e-commerce services may be provided nationwide, the place of registration and services facilities of the companies must be located within the FTZ.2

Since there are foreign ownership restrictions on the value-added telecommunication services in China, including e-commerce, it is has been common practice for e-commerce operators that seek overseas financing or overseas listings to adopt the VIE structure,3 a form of contractual control that avoids direct ownership of the operating e-commerce company. Recent years have witnessed several major Chinese e-commerce companies utilizing the VIE structure when listing overseas; however, the legality of the VIE structure has never been confirmed. As a result of the FTZ New Policy, a significant revolution may take place in the e-commerce industry, since the VIE structure will no longer be necessary for foreign-owned e-commerce companies located in the FTZ.

Notably, the Foreign Investment Law of the People's Republic of China (Draft for Soliciting Comments) ("Draft Foreign Investment Law"), issued by the Ministry of Commerce on January 19, 2015, changes the standard for defining foreign ownership by requiring that domestic Chinese companies "controlled" by foreign investors be deemed as foreign owned. Simultaneously, the mechanisms by which a foreign-owned entity is capable of imposing decisive influence on the operations, financial affairs, personnel, or technologies of a domestic enterprise through contracts, trusts, or other vehicles, are added to the definition of "control." Once the Draft Foreign Investment Law takes effect, the VIE structure may no longer be tacitly permitted in investments where foreign ownership is restricted. Under this backdrop, the FTZ New Policy has been issued at an opportune time for foreign investors in e-commerce operators.

In addition to the FTZ New Policy, other changes aiming to further loosen ownership restrictions in e-commerce are being made. On November 4, 2014, the National Development and Reform Commission promulgated the Catalogue for the Guidance for Foreign Investment Industries (Draft Revision) (2014) ("2014 Draft Guidance") to solicit public input.4 Pursuant to the 2014 Draft Guidance, the ownership of foreign investment for value-added telecommunication services shall not exceed 50 percent, but e-commerce is excepted from this restriction. The 2014 Draft Guidance allows foreign ownership in e-commerce companies to exceed 50 percent on a nationwide basis, but it is still uncertain if a WFOE model in e-commerce businesses nationwide will be permitted. However, the first sentence of the FTZ New Policy indicates that if the policy works well in the FTZ, it may be duplicated and extended to other pilot zones.


1 On January 6, 2014, the Ministry of Industry and Information Technology and the People's Government of Shanghai jointly issued Opinions on Further Opening up Value-added Telecommunications Business in China (Shanghai) Pilot Free Trade Zone. On April 15, 2014, the Ministry of Industry and Information Technology and the People's Government of Shanghai jointly issued Administrative Measures of China (Shanghai) Pilot Free Trade Zone for the Pilot Operation of Value-added Telecommunications Business by Foreign Investment.

2 Article 2.4 of Opinions on Further Opening up Value-added Telecommunications Business in China (Shanghai) Pilot Free Trade Zone provides that the place of registration and service facilities of companies applying for engaging in the online data processing and transaction processing business shall be located inside the Pilot Zone.

3 The Variable Interest Vehicle, which permits investors to indirectly invest in a PRC companies through contractual arrangements rather than through shareholding.

4 The deadline for providing input was December 3, 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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