Foreign investment in China’s Internet has always been heavily regulated. Although there have been some promising recent openings, making sense of the different licenses required to operate a website in China and the availability of such licenses to foreign invested enterprises can be very confusing This article tries to make sense of some of this.
Website Hosted Offshore
China’s Internet regulations do not generally purport to regulate the operation of foreign websites. For the operator of an offshore website (i.e. servers outside mainland China), there is no requirement to secure specific licenses in China.
However, an offshore website which seeks to address the Chinese market may be subject to other challenges in terms of increased latency and the possibility that access could be blocked by China’s Great Firewall. Although the Great Firewall is supposed to be focused on blocking undesirable foreign websites, the standards for blocking sites are not transparent, and some sites may be readily available one day, but not available on another day. Websites are particularly susceptible to targeting by the Great Firewall if they contain content that could be deemed politically or socially sensitive. However, it is not unusual for a foreign website that does not fall afoul of such sensitive content to be blocked, either temporarily or permanently, without explanation. For example, websites that appear to rely on Google APIs or resources may be difficult to access from China, or a website may be blocked because it contains a word which is on the unpublished blacklist used by the Great Firewall’s filter. Restrictions tend to be tightest around the time of politically significant dates.
Website Hosted Onshore
As compared to an offshore website, a local website can be faster and more stable for end-users in China. However, an onshore website is also subject to the full Chinese licensing regime.
1. ICP License vs. ICP Filing
The operator of a website in China needs to obtain an internet content provider (“ICP”) license or complete an ICP filing, depending on the function of the website. Under Chinese law, a company that provides “commercial internet information services in China” must secure an ICP license to carry out its business, while a company providing “non-commercial internet information services in China” only needs to complete an “ICP filing.” In practice, whether the company generates revenue or makes a profit from internet information services is usually the key determinant of whether a website will be treated as “commercial” or “non-commercial” by officials. A company that wants to complete an ICP filing must be the Chinese company that operates the website with an onshore domain name. Thus, a foreign company that wants to set up an onshore website must do so through its onshore affiliate and obtain its domain from a Chinese supplier rather than an offshore supplier.
Currently only Chinese nationals and joint ventures with foreign shareholding not exceeding 50% are qualified to secure an ICP license to provide information services “for profit”.
Foreign companies that operate “for profit” websites in China typically have to partner with a Chinese company to set up a joint venture, or set up a “captive company” where the company is registered under the name of the Chinese national who contractually agrees to operate the company according to instructions from the foreign investor (sometimes called a “VIE”). Captive companies are very common in China’s internet sector (almost all Chinese internet companies that are listed overseas use this structure), although the structure has its risks. In addition to these shareholding requirements, other requirements for securing an ICP license include sufficient capital and professional staff, ability to provide long-term services, a minimum registered capital, infrastructure, and no prior record of violating the law.
2. OCP License
Companies that engage in internet cultural activities within China (such as production, reproduction, or uploading of “Internet cultural products”) “for profit” — whether by way of charging internet users or through ecommerce, advertisement or sponsorship — are required to secure an Online Culture Operating Permit (an “OCP License”). If such activities are carried out on a not-for-profit basis, filing with the relevant authority is sufficient.
Under Chinese law, the scope of internet cultural products is relatively broad. In most cases, the authorities would view the following examples as internet cultural products: music videos or videos that contain a plot (such as TV plays or films) which are made for transmission via the Internet.
Foreign investors are currently not eligible for an OCP License, and as a result, companies with foreign investment who offer such services typically rely on a “captive company” structure.
3. Internet Audio/Video Program Transmission License
In China, companies that provide services for broadcasting, integrating, or downloading “audio-visual programs” need to secure an Internet Audio/Video Program Transmission License (an “Audio/Video License”). Audio-visual programs are defined as audio-visual programs consisting of movable pictures or sounds which can be listened to continuously and which are shot and recorded by making use of video cameras, cameras, recorders and other audio-visual equipment for producing programs. Films and television programs are obvious examples.
While a domestic website that hosts videos must have an Audio/Video License , if the video is uploaded to and saved on a video delivery platform like Youku Tudou Inc. (“Youku”) — i.e., the domestic website streams the content through an embedded player like Flash that pulls the content from Youku — then the website will generally not be required to secure an Audio/Video License. Implicit is that the streaming of the content is covered by the Youku’s licenses.
Since 2008, only State-owned companies are eligible for Audio/Video Licenses. Some private companies like Youku hold licenses because they were grandfathered in.
4. Other Notable Licenses
In addition to the licenses discussed above, we discuss some special cases below and the related licensing impact.
- a) Online Advertising If a website posts advertisements for third-party products, especially when a fee is charged for the posting, the website will be deemed to provide internet information services “for profit,” and an ICP license is required.
- b) Online Shop For a website that sells its own products without providing any other “for-profit” services, an ICP filing is sufficient. However, if a website is used as a platform to sell third-party products, a value-added telecommunications license for “online data processing and transaction processing service” is required. China relaxed relevant rules on such licenses in 2015, and this license is available to 100% foreign-owned companies.
However, the rules are not clear as to whether such an online retailer would also be required to secure a separate ICP license. If an ICP license is required by local authorities, this would preclude 100% foreign ownership. In this respect, it is notable that, in practice, almost all of China’s e-commerce websites hold an ICP license. In part this is for historic reasons. Such business was traditionally classified as a type of “commercial internet information service.” by officials when applying the criteria of “for profit” as discussed above. However, this also adds to the confusion in different jurisdictions in terms of how the rules should be applied currently.