Introduction

On June 30, 2016, the Ministry of Industry and Information Technology (MIIT) of the People’s Republic of China (China) promulgated a notice entitled “Notice on Issues Concerning Provision of Telecommunication Services by Hong Kong and Macau Service Providers in China” (Notice), liberalizing certain types of telecommunications and electronic commerce services provided by Hong Kong and Macau service providers in China. The Notice took effect on the same date as its promulgation.

Background

Pursuant to the Administration Regulations for Foreign Investments in Telecommunications Enterprises dated September 10, 2008 (State Council Order No. 534), the foreign party (which includes Hong Kong or Macau party) of a Sino-foreign joint venture providing telecommunications, online businesses, or electronic commerce services in China must not own more than 49% (for infrastructural telecommunications services) or 50% (for value-added telecommunications services) of the total ownership of the joint venture. In other words, it was traditionally forbidden for any telecommunications businesses, online businesses and electronic commerce services in China to be majority-owned or controlled foreign enterprises.

The Notice

The Notice serves to liberalize the Hong Kong and Macau ownership in various types of telecommunications and online businesses in China. It permits Hong Kong and Macau service providers to establish majority-owned joint ventures or wholly owned enterprises in China, if the relevant enterprise provides the following types of telecommunications or online businesses:

(i) Operation of online data processing and transaction processing services by for-profit electronic commerce businesses;
(ii) Domestic multi-party communication services;
(iii) Storage and forwarding services;
(iv) Call center services;
(v) Provision of internet access services to internet users; and
(vi) Information service businesses that are considered as “app stores.”

However, the Notice further provides that for the provision of the following types of telecommunications and online businesses, the Hong Kong or Macau joint venture partner must not own more than 50% of the joint venture in China:

(i) Operation of online data processing and transaction processing services other than by for-profit electronic commerce businesses;
(ii) Domestic virtual private network services;
(iii) Internet data center services;
(iv) Provision of internet access services other than to internet users; and
(v) Information service businesses that are not considered as “app stores.”

Significance

This liberalization trend started in January 2015, when foreign ownership restrictions for commercial online data processing and transaction processing services operators were removed for enterprises located in the Shanghai Pilot Free Trade Zone (which applies to all foreign enterprises instead of only Hong Kong or Macau enterprises).

The Notice signifies further liberalizations granted to Hong Kong and Macau service providers by providing an additional five types (i.e., a total of six types) of telecommunications and online businesses in China with up to 100% ownership by the Hong Kong and/or Macau party as described above. It also means that it is no longer necessary for Hong Kong or Macau-based entities to adopt variable interest entity (VIE) structures if their businesses falls into one of the six types of telecommunications and online businesses.

Businesses should also note that the Notice does not provide for elaboration of the six types of services described above. Although there are other regulations in China providing for more detailed specifications, companies may sometimes encounter problems in determining the precise type(s) to which their telecommunications and internet services may belong to. Companies are advised to consult their legal advisors if in doubt as to the precise ambit of application of the Notice and other relevant regulations.