For the past 20 years, Shanghai has been the home for regional headquarters (“RHQs”) for multinational companies that have extensive investments in China. By the end of 2016, 580 RHQs were established by multinational companies in Shanghai, such as GE, Citigroup, General Motors, Nike and many other Fortune 500 corporations. These RHQs not only created various job opportunities but also made significant economic contributions in Shanghai.

Shanghai has issued and amended several times its policies on encouraging the establishment of RHQs. On Jan. 27, 2017, facing the new economic challenges and exploring economic synergies brought about by the RHQs, the Shanghai Municipal Government (the “Shanghai Government”) revised again its policies and released the Provisions on Encouraging the Establishment of Regional Headquarters by Multinational Corporations (the “2017 Amendments”). The 2017 Amendments took effect on Feb. 1, 2017, and will be valid for five years.

Compared with its precedent enacted in December 2011 (the “2011 Rules”), the 2017 Amendments lower the threshold of establishment requirements and create more benefits for RHQs.

Establishment Requirements and Thresholds

In addition to the traditional RHQs that are regulated in the 2011 Rules, the 2017 Amendments incorporate a new concept of “functional RHQs”, expanding the scope of enterprises entitled to preferential policies previously granted to RHQs by the Shanghai Government. Below, we highlight several key aspects of difference between the 2011 Rules and the 2017 Amendments.

2011 Rules

2017 Amendments

Entities regulated under the provisions (Definition of RHQs and Functional RHQs)

RHQs Only

RHQs

Functional RHQs

A sole headquarters established in Shanghai through investment or authorization by a parent company incorporated outside China, that performs management functions and provides services to enterprises in a region consisting of more than one country.

Same definition as in the 2011 Rules

A wholly foreign-owned enterprise (“WFOE”), or a branch office, which does not meet the requirements of a RHQ, but carries out actual functions of an RHQ, including providing supporting services, such as management decision-making, capital management, procurement, sales, logistics, settlement, research and development and training services to enterprises under its management.

Entity Status

Must be established in the form of a wholly foreign-owned investment enterprise, or a wholly foreign-owned management enterprise; enterprises with legal person status REQUIRED.

Same requirements as in the 2011 Rules; enterprises with legal person status REQUIRED.

A WFOE or a branch office. A branch office is considered not to have legal person status. Enterprise with legal person status NOT REQUIRED.

Recognition Thresholds

(1)The enterprise must be a WFOE with independent legal person status.

(2)The foreign parent company shall have total assets of no less than USD 400 million. This is a fit-all requirement for all industries under the 2011 Rules.

(3)(A) The total paid in registered capital by the parent company in all subsidiaries in China shall be no less than USD 10 million, and the total number of enterprises under management both inside and outside China from authorization of the parent company shall be no less than three; or (B) the total number of enterprises under management both inside and outside China from authorization of the parent company shall be no less than six.

(4)The registered capital of the enterprise shall be no less than USD 2 million.

Item (1), (3), and (4) remain unchanged under the 2017 Amendments.

For item (2), considering the different need of assets by different industries, the 2017 Amendments especially lower the total assets requirement for service industries. If the enterprise is in a service industry, the parent company’s total assets shall be no less than USD 300 million.

(1)The enterprise can either be a WFOE or a branch office.

(2)The parent company must have total assets of no less than USD 200 million, and must have established no less than two foreign-invested enterprises in China; at least one of the already established enterprises must be located in Shanghai.

(3)The registered capital of the enterprise must be no less than USD 2 million. If the enterprise is a branch office, the enterprise shall have no less than USD 2 million operational funds allocated from its parent company.

Business Activities Requirements

Under the 2011 Rules, an RHQ is permitted to engage in the following operational, management and service activities:

(1)Decision making on investments and operations;

(2)Use of capital and financial management;

(3)Research and development, and technical support;

(4)Commodities purchase, sales and marketing services;

(5)Supply chain management and other logistic operations;

(6)Sharing services within internal groups and outsourcing services of overseas companies; and

(7)Staff training and management.

This article no longer appears in the 2017 Amendments, which indicates, pending official government endorsement, that the RHQs and functional RHQs now appear to have more flexibility to decide what types of services they may provide to the companies under their management.

Preferential Policies: The 2017 Amendments adjust and revise the current preferential policies applicable to RHQs, and expand the application of certain policies to functional RHQs. The most recent policies applicable to RHQs and functional RHQs are summarized in the chart below:

Item

Preferential Treatment Policies

Applicable to RHQs?

Applicable to functional RHQs?

Financial Subsidies and Rewards

1.Formation subsidy and office rent subsidy: Subject to certain conditions and restrictions, certain RHQs are entitled to RMB 5 million as a formation subsidy, as well as a yearly office rental subsidy equivalent to 30% of the rent price for the office space for three years.

Yes

No

2.Business Turnover Reward: Subject to certain conditions and restrictions, certain RHQs are entitled to RMB 10 million or RMB 5 million for their outstanding contributions to local economy when their business turnover reaches certain standards. The subsidy is payable in three years at the percentage of 40%, 30% and 30% each year.

Yes

No

3.Upgrading Subsidy. If a foreign parent company establishes a new RHQ in Shanghai for the Asia region, Asia Pacific region or a greater region and reaches certain standards, the RHQ will be entitled to RMB 8 million as an upgrading subsidy payable in three years at the percentage of 40%, 30% and 30% each year.

Yes

No

Capital Management

1.Centralized Systems. Subject to certain conditions, RHQs and functional RHQs are entitled to centralized fund management system, and centralized operation and management of foreign exchange funds.

Yes

Yes

2.Financing Company. The qualified RHQs are encouraged to set up finance companies to provide consolidated financing services for their domestic subsidiaries.

Yes

No

3.Cross-border RMB Business. RHQs and functional RHQs are encouraged to conduct different cross-border RMB related business, and to enhance their capital usage efficiency through channels such as the cross-border bidirectional RMB capital pools.

Yes

Yes

Human Resources

1.Foreign Employees. Various policies are granted to RHQs and functional RHQs to facilitate visa application (multiple entry visa with a valid term of no more than one year and with each stay of no more than 180 days), residential permits (three to five years residential permits) and working permits for their foreign employees and their relatives.

Yes

Yes

2.Domestic Employees.

(i)Visa and Passports. Various visa policies are granted to RHQs and functional RHQs to facilitate the application of APEC business travel card, passports, Hong Kong/Macau Passes and Taiwan Passes for their domestic employees.

Yes

Yes

(ii)Household Register. Any domestic employees introduced by RHQs and functional RHQs who meet the relevant conditions for talent may get the household register (also known as “Hukou”) of Shanghai.

Yes

Yes

(iii)Other conveniences. District level government shall provide conveniences for the domestic talent introduced by RHQs and functional RHQs in respect of children school selection, medical treatment, and application for talent apartments.

Yes

Yes

Customs

Customs. Local Customs and Entry-Exit Inspection and Quarantine authorities should also facilitate the import and export business of RHQs and functional RHQs. RHQs and functional RHQs are encouraged to set up logistics distribution centers to consolidate group logistics.

Yes

Yes

District Level Government Support

District level government authorities are permitted for the first time under the 2017 Amendments to formulate local preferential policies to support the development of RHQs and functional RHQs within their jurisdictions.

Yes

Yes

Conclusion

With the implementation of the 2017 Amendments, we expect that more RHQs as well as functional RHQs will come to Shanghai for incorporation and business opportunities.