The Ministry of Industry and Information Technology (“MIIT”) recently issued the Notice on Removing Restriction on Foreign Equity Ratios in Online Data Processing and Transaction Processing Business (Operating E­ commerce) (“Circular 196”). Circular 196 extends the policy of allowing 100% foreign shareholding in e­ commerce business enterprises from the Shanghai Free Trade Zone (“Shanghai FTZ”) to nationwide.

Background

Over the past few years, laws and regulations have been amended to cope with the fast growing pace of e­ commerce in China. In January 2014, MIIT and the Shanghai Government first issued the Opinion on Further Opening Up the Value­added Telecommunications Service in China Shanghai FTZ (“2014 Opinion”). The 2014 Opinion promoted developments for foreign investment in e­commerce business in the Shanghai FTZ by increasing the foreign shareholding cap from 50% to 55%. One year later, in January 2015, MIIT removed the cap restriction in the Shanghai FTZ, allowing 100% foreign shareholding in e­commerce business. On June 19, 2015, MIIT issued Circular 196 to abolish the territory restriction, which theoretically allow any foreign investor to conduct e­commerce business in China.

Definition of e­commerce

As there is currently no statutory definition of “e­commerce”, one can argue what falls within an e­commerce business. The relevant authorities are still reluctant to grant approval and license(s) to e­commerce companies providing services rather than commodities.

The draft Telecommunication Services Catalogue, which was released in 2013 but yet to be promulgated, defined e­commerce as a public platform service for transaction of services and goods. This draft clearly prescribes providing services is a category of transaction e­commerce companies can be involved in and shall therefore obtain license/recordal accordingly.

Broadly speaking, e­commerce business is composed of self­operated e­commerce business enterprises (i.e. a company selling its own products through its own website) and e­commerce platform business enterprises (i.e. online platform enabling third parties to sell products) but, strictly speaking, only e­commerce platform businesses are covered in Circular 196 as they are required to obtain the Value­added Telecommunications Service (“VATS”) license.

Licenses for e­commerce

Obtaining e­commerce business licenses in China is crucial. Foreign­funded enterprises investing in VATS need as many VATS licenses as the number of specific activities they are involved in, for example the two most common VATS licenses for doing e­commerce business are the one covering online data processing and transaction processing business, and the one covering information service, which is usually referred to as ICP license.

According to a notice issued by the PRC Ministry of Commerce in 2010 regarding foreign investment in internet and vending machine sales, a self­operated e­commerce business enterprise only needs ICP recordal as they are considered as an extension of an enterprise’ sales channel, i.e. on the internet, whereas an e­commerce platform enterprises shall obtain both the VATS license covering online data processing and transaction processing business and ICP license. However, the understanding may differ from one region to another as Jiangsu Telecommunication Bureau confirmed this understanding, while Beijing Telecommunication Bureau expressed that only ICP recordal is necessary for any e­commerce business.

Remaining Obstacles for Foreign Enterprises Investing in e­commerce

Although Circular 196 removes the foreign ownership restriction, the specific procedure and other requirements for foreign enterprises investing in e­commerce business in China, as prescribed in the Provisions on the Administration of Foreign­funded Telecommunications Enterprises (2008 Revision) (“2008 Measures”), are still in effect and applicable to foreign investors. For example, a foreign­funded enterprise operating VATS across several provinces still requires RMB 10 million in registered capital.

In addition to the capital requirement, there is a threshold for investors’ experience. The 2008 Measures prescribes that the major foreign investor shall have “good performances and experience in managing value­ added telecommunication business”. This may be an insurmountable obstacle for foreign investors that are financially abundant but with no experience in operating similar business.

The 2008 Measures also prescribes application procedures for the establishment of a foreign­funded telecommunication enterprise. Enterprises operating VATS in one province shall first file an application with the provincial telecommunication authorities, which will decide within 60 days before transferring the application to MIIT (if approved). MIIT shall decide whether to grant approval within 30 days. Enterprises operating VATS in more than one province shall submit their application to MIIT directly, which will decide within 90 days after the application is received. From the public data accessible on MIIT’s website, only 28 foreign­funded telecommunication enterprises obtained its approval between 2003 and 2008, and 17 from 2013 up to now, reflecting how strict and conservative the relevant authorities were when granting approvals for foreign­funded telecommunication enterprises.

The implementation of Circular 196 is partially calming the heated discussions about the VIE model, which is used by foreign investors to enter restricted industries in China with foreign ownership restrictions, e.g. VATS. As Circular 196 abolished the foreign ownership cap for e­commerce business, the necessity to use the VIE model to get around the restrictions also disappears.

Although some of the foreign­funded telecommunication enterprises may no longer need it, the VIE model still presents advantages. Circular 196 is only opening the market for e­commerce business, foreign shareholding restrictions in other VATS remain intact. So do the requirements of registered capital and foreign investors’ performance and experience as mentioned above. For foreign investors who are still facing unsolved difficulties when investing in VATS in China, the VIE model may remain an option. However, as addressed in the May 2015 Issue of Keep Your Counsel, the future of VIE structures remain uncertain under the draft Foreign Investment Law.

Conclusion

With the various interpretations and practices of license requirement in the past, the recent publication of Circular 196 and the lack of guidance in relation to detailed regulations enforcement, foreign investors should remain cautious when expanding their business into e­commerce in China. Each situation shall be analyzed case by case until further notice. With Circular 196, China confirms its position ­ initiated since the 2014 Opinion ­ of

relaxing its e­commerce regulation to set a more welcoming environment to foreign investment in e­commerce business, which will ultimately be beneficial to the Chinese customers as they are granted an easier access to foreign products.