Since its launch in 2013, the China (Shanghai) Pilot Free Trade Zone (CSPFTZ or Zone) has been attracting increasing amounts of foreign investment in many sectors.The recent memorandum of understanding between American giant Amazon and the CSPFTZ, under which Amazon launched its new cross-border e-commerce platform inside the Zone, has generated particular excitement. This new development, combined with interest from other major players, has led to further loosening of restrictions in the online data processing and transaction processing business (e-commerce) sector. Carlo D’Andrea of D’Andrea and Partners and Chair of the Legal and Competition Working Group in Shanghai divulges details below, including how a foreign-invested enterprise (FIE) can be registered in the Zone.

Registered capital share: from 55 to 100

On 13^th January, 2015, the Ministry of Industry and Information Technology’s (MIIT’s) Notice on the Lifting of the Cap on Foreign Investment in Online Data Processing and Transaction Processing Business (e-commerce) in the China (Shanghai) Pilot Free Trade Zone (Notice) was issued, detailing a further loosening of restrictions on the ratio of foreign shareholding in e-commerce within the CSPFTZ.

Previously, foreign investment in this sector was capped at 55 per cent inside the Zone,[1] and businesses could only be operated by Sino-foreign joint ventures (JVs) or Chinese domestic enterprises. Now, the cap for foreign investment in e-commerce has been raised to 100 per cent or, in other words, the cap has been removed altogether. Therefore, wholly foreign-owned enterprises (WFOEs) are allowed to establish e-commerce operations in CSPFTZ.

The Notice represents a huge step forward in the e-commerce industry. Up until now e-commerce in China has been mainly monopolised by Chinese companies such as Alibaba, JD.com and Suning, with foreign competitors prevented from fully entering the market by themselves due to the aforementioned restrictions. With the release of the Notice, foreign players in this industry can not only set up their own company as a WFOE in the CSPFTZ, they can now also start to gradually implement their strategic plans for the Chinese e-commerce market.

Establishing a FIE in the CSPFTZ

The establishment of FIEs is much faster within the Zone compared to other areas in China. Approval procedures have been abolished in favour of registration unless otherwise stated, based on the State Council’s Special Administrative Measures of China (Shanghai) Pilot Free Trade Zone for Admittance of Foreign Investments (Negative List). Pre-approval from the Ministry of Commerce (MOFCOM) is no longer necessary before registering FIEs with the Administration of Industry and Commerce (AIC)

Potential investors should first search for their target industry for investment in the Negative List: if is not contained within they can simply complete the Backup Record Registration Form with the relevant information regarding their investment and submit this form to the CSPFTZ administration authority. After that the investors can then move forward with administrative procedures with the AIC, tax registration and the other standard procedures.

To further simplify matters the new ‘one-stop application processing platform’ in the CSPFTZ means that investors are able to deal with all authorities under one roof. This means they are spared the inconvenience of spending several days travelling between different offices, as is frequently the case for FIEs setting up investments outside the Zone.

E-commerce outside the Zone

In addition to the heavy commercial competition provided by Chinese e-commerce companies FIEs in the e-commerce sector that are based outside the CSPFTZ still face a number of limitations. According to the Provisions on the Administration of Foreign-funded Telecommunications Enterprises (2008 Revision) the ratio of foreign investment in telecom value-added services shall not exceed 50 per cent. This means that outside of the CSPFTZ foreign capital is only permitted in the form of an Equity JV in the e-commerce industry. This provides a huge incentive for foreign investors to establish their e-commerce operations inside the Zone.

Expectations for future development

With the rapid development of the Internet, e-commerce is likely to become one of the mainstays of China’s economic development. Last year, the vice minister of the MIIT revealed at China’s first Internet Conference that the e-commerce industry is set to be fully opened up to foreign investment, with related policies being drafted. However, as yet no schedule for this development has been forthcoming.

From the release of the Opinions in January 2014, to the Notice, issued in January 2015, the ratio of foreign investment in value-added telecommunications services in CSPFTZ has been lifted from 55 per cent to 100 per cent in just one year. So it is natural to anticipate that the rules for foreign investments in e-commerce will become increasingly flexible, creating an even more favourable environment for foreign investors in this field. In addition, since the CSPFTZ is the designated area piloting new policies that will eventually be implemented nationwide we could reasonably expect that WFOEs might be permitted to participate in e-commerce nationwide in the not-too-distant future.

Although recent developments are extremely encouraging it needs to be kept in perspective – E-commerce businesses rely on fast and reliable Internet access. As indicated in the recent survey conducted by the European Chamber: 86 per cent of businesses reported a negative effect on their business as a result of certain websites and online tools being blocked; 80 per cent of respondents recorded a worsening business impact as a result of the recent further tightening of Internet controls since the beginning of 2015. So it will be interesting to observe which exerts the greater force in this industry – the lure of a more open market or the deterrent of a restricted operating environment.

With offices in China in Shanghai, Nanjing and Zhuhai and a network of professionals around the world, D’Andrea & Partners assists with legal services European companies in China as well as Chinese companies wishing to enter the global market through the establishment of foreign-invested enterprises and/or by mergers and acquisitions. The team is composed of both Chinese and European professionals, many of whom have experience of legal practice outside their home country.

[1] Opinions of Ministry of Industry and Information Technology and Shanghai Municipal People’s Government on Further Opening Value-added Telecommunications Services to Foreign Investment in the China (Shanghai) Pilot Free Trade Zone