Shanghai has always been the national leader in the foreign direct investment field. As the pivot power house for the Yangtze Delta region, it aims at position itself as the main and most attractive location for MNCs to set up their regional headquarters (“RHQ”). Already back in 2002, the city published Interim Provisions on Encouraging Foreign Multinational Corporations to Establish Regional Headquarters, with the formal version launched in 2008 which was further updated in 2011 (“RHQ Provisions”) bringing more substantial incentives and convenience facilitating operation of MNC headquarters. The result is remarkable: by the end of 2016, 580 MNCs have set up their regional headquarters in the city which ranks No. 1 across China. Yet this is not enough, in particular at a time when China is asking for more foreign direct investment, as reflected by the very recent Circular of the State Council on Several Measures concerning the Expansion of Opening-up and Active Use of Foreign Capital (Circular 5). Again, Shanghai takes the lead presenting a new version RHQ Provisions to the public which escalates incentives and will take effect as of February 1, 2017 (“2017 Provisions”). Below are some highlights of the new development under the 2017 Provisions.

Expanded application scope

Compared with previous rules, the 2017 Provisions now more focus on the actual function of a RHQ candidate which results in the below changes

(i) requirement of an explicit business scope covering “investment” or “management” is now dropped (ii) an existing and broader concept of a quasi RHQ (i.e. so-called “RHQ type establishment/总部型机构” which first appeared under some earlier RHQ related supplementary rules named Circular 348 issued in 2014, “RHQTE”) is officially endorsed providing more flexibility for MNCs to enjoy related preferential treatment (iii) RHQ qualification requirements are streamlined, which used to vary depending on different type of incorporation (i.e. an investment holding company incorporated according to special rules or a common limited liability company with management function)

Above (ii) is of particular significance since it now allows almost all kinds of wholly foreign owned enterprises (“WFOEs”) as well as their branches being eligible to claim for RHQ preferential treatment, as far as they assume supporting functions for more than one country which relate to management decision-making, treasury management, procurement, sales, logistics, payment settlement, R&D or training. For easier overview and comparison, we summarized in below table more details about such legislative development.

* Candidates for RHQ Treatment and Qualification Requirements

Previous Rules2017 Provisions
(i) an investment holding company incorporated under the special rules of the Ministry of Commerce fulfilling below requirements- mother company’s total assets no less than USD 400 million and having established at least one foreign investment enterprise (“FIE”) in China with more than USD 100 million of registered capital already paid in, or

- having already established over ten FIEs in China with more than USD 30 million of registered capital already paid in

or

(ii) a normal WFOE having a management function fulfilling below requirements- minimum registered capital USD 2 million, and- mother company’s total assets no less than USD 400 million, and- managing over three companies in or outside of China with no less than USD 10 million of registered capital already paid in (or managing over six companies in or outside of China)
(1) candidates (i) and (ii) as elaborated in the left column, plus any other WFOE irrespective of business scope (e.g. a manufacturing WFOE) shall be subject to the below unified qualification requirements- total assets of their mother company no less than USD 400 million (or USD 300 million if you are in service sector), and- managing over 3 companies in or outside of China with no less than USD 10 million of registered capital already contributed (or managing over 6 companies in or outside of China)

- over (inclusive) USD 2 million registered capital

or

(2) a RHQTE which may be a normal WFOE or even its branch fulfilling below requirements- mother company’s total assets over (inclusive) USD 200 million, which has established more than two FIEs in China with at least one registered in Shanghai; and

- over (inclusive) USD 2 million registered capital (or operation funds for a branch)

Note: a RHQTE under the old Circular 348 was subject to more complicated qualification requirements while not enjoying full preferential treatment of a RHQ. We did not compare its qualification requirement change in detail here.

New Incentives

Besides making related treatment more generally available, the 2017 Provisions bring existing incentives up to another level which touch upon cash pooling, personnel mobility, customs clearance, etc. Many of these incentives obviously have been mirrored by some other existing initiatives of Shanghai in e.g. furthering the China Shanghai (Pilot) Free Trade Zone (SHFTZ) project and building Shanghai as an innovation and science center. These incentives are generally available to both a qualified RHQ and a qualified RHQTE (i.e. no different treatment), which, among others, include

  • Treasury Management Facilitation: foreign exchange cash pooling [as well as other treasury management facilitation] would be allowed under the existing framework of the Administrative Provisions on the Centralized Operation of Foreign Exchange Funds of Multinational Corporations (see more details in another earlier newsletter of ours at SAFE Circular 36 – MNC Forex Funds Pools Further Liberalized. Also two-way cross-border RMB cash pooling, netting settlement, centralized cross-border RMB receipts and payments under current accounts will be encouraged. Fast track will be made available to handle non-trade current account payment transactions including related tax formalities. Those incorporated in the SHFTZ may further open free trade accounts to handle onshore payment in RMB as well as cross-border payments in foreign exchange.
  • Border Control Convenience: the 2017 Provisions will allow qualified Chinese employees of a RHQ/RHQTE to apply for APEC Business Travel Card (ABTC). This is a program under the APEC Business Travel Card Operating Framework which allows holders to travel across many APEC countries/ regions for business purpose without need for a separate visa (similar to Schengen scheme in EU). In addition, a Shanghai residence permit for overseas talents (Type B) will be made more easily available to qualified expatriates of a RHQ/RHQTE as well as to their spouses and kids (irrespective of whether or not you are senior management personnel). The 2017 Provisions also hint more convenience to expatriates of a RHQ/ RHQTE for their work/ residence permit application under the recent national wide new immigration policy taking effect as of April 1, 2017 (which also aims at facilitating expatriates’ working permit in China but imposes stricter qualifications requirements compared to the old regime).
  • Other facilitation and add-ons: the 2017 Provisions give a general signal that RHQs/RHQTEs will further enjoy support from customs and the quarantine authorities to facilitate their import and export processes. Their bonded facilities will be subject to simplified supervision measures by the customs, foreign exchange and quarantine authorities aiming at supporting their group level logistics consolidation. Another worth noting aspect is that for the first time, the municipal government of Shanghai delegates power and freedom to the district-level government to formulate their own customized incentive policies to attract more MNCs to set up RHQs/RHQTEs in the respective district.

Prospect

More details are yet to be spelt out under the 2017 Provisions, but one may already foresee a glimpse of the promising picture ahead. The launch of the 2017 Provisions exactly reflects Shanghai’s ambition elaborated in its 13th Five-Year plan, i.e. its goal to become international centers for economy, finance, trade and shipping (i.e. the so-called “four centers vision”) by the year of 2020. This also indicates the important role MNCs hold as key KPIs for evaluating local government’s economic developments and achievements. In some other similar plan focusing on developing service sectors and establishing an international trade center, Shanghai already sets a quantified goal to attract over 735 RHQs to Shanghai by 2020, among which over 100 shall cover functions for Asia-Pacific or an even broader region. Taking into consideration the good trend and the positive measures ahead, one may say that Shanghai has a solid base to achieve this ambition. Those MNCs not yet landing their RHQs in the city are advised to have a closer look at this recent development.