Foreign investors have long been restricted from establishing and operating e- commerce platforms in China. They were required to operate e-commerce businesses through a joint venture with domestic partners, in which their shareholding was limited to 50%.
China’s emerging pilot free trade zones have been providing new opportunities for foreign investors. When the China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”) was launched in late 2013, pilot free trade zones allowed foreign investors up to a 55% shareholding in joint ventures in e-commerce businesses. On January 13, 2015, in the Circular on Removing the Restrictions on the Foreign Equity Ratios in Online Data Processing and Transaction Processing Services (Operating E- commerce) in the Shanghai FTZ, the Chinese Ministry of Industry and Information Technology (“MIIT”) announced that foreign investors could operate in these two areas through wholly foreign-owned enterprises (“WFOE”) within Shanghai FTZ.
MIIT allows e-commerce companies established in Shanghai FTZ to carry out their e-commerce businesses nationwide.
In a recent public speech, MIIT specified that China has decided to further open up online data processing and transaction processing businesses to foreign investors and allow them to fully own e-commerce companies engaging in these businesses in China, extending the pilot scheme launched in Shanghai FTZ nationwide.
A further sign that China has opened up e-commerce to foreign investors is the Guiding Catalogue of Industries for Foreign Investment, amended in April 2015 (“Catalogue”), which for the first time establishes that the limitation on the ratio of foreign investment participation on value-added telecommunication services (up to 50%) does not apply to e-commerce business.
The scope of e-commerce businesses opened up to foreign investment is expected to surpass the liberalized scope in Shanghai FTZ, including internet, mobile social networking and third-party online payment platforms as included in the definition of value-added telecommunication services under the Chinese legal framework.
The liberalization of the e-commerce businesses is expected to enable foreign investors to operate several e-commerce platforms by adopting simple WFOE structures, without having to use other vehicles (including variable interest entity “VIE” structures) to avoid the shareholding limitation.