The necessary regulatory steps and framework to make it possible

Understanding the online environment can be tricky in China as telecommunications has rapidly changed in the past few years. By examining information technology from the legal perspective, foreign businesses can gain a more realistic understanding of China’s value-added telecommunications services (VATS). Helen Ju, legal advisor at the EU SME Centre, explains the opening of China’s VATS to foreign investment under the country’s World Trade Organization (WTO) commitments and what they mean for European Union (EU) small and medium-sized enterprises (SMEs) in China.

Online service provisions are very popular in China.[1] The EU SME Centre, often receives questions such as:

1. Can we provide online games to Chinese customers by setting up a Chinese website?
2. We want to set up a website in China to provide online sports trainings. There will be coaches who can remotely review and instruct Chinese customers. What requirements does our company have to comply with?
3. Can we publish a book online on ‘X’ topic in China?

With the development of information technology (IT), many of those questions can be answered in the affirmative. However, are all of those things possible from a legal perspective? The WTO has outlined four modes of delivering service: cross-border supply, consumption abroad, commercial presence and presence of a natural person. When looking at it from a legal perspective, it is important to understand why setting up a website in China is considered to be establishing a commercial presence and how China’s VATS fall under China’s WTO commitments.

VATS classifications
According to the recently revised Classification Catalogue of Telecommunications Services, VATS are currently divided into 10 categories[2] each of which is further divided into several sub-categories. For example, category B25 on information services includes: sub-categories on information publishing and delivery services, information search services, information community platform services, instant information exchange services, and information security and processing services.

Many foreign investors have the impression that VATS businesses are highly regulated in China and mistakenly think that the proposed service does not touch on sensitive areas for the Chinese Government. However, in many circumstances this is not the case.

China’s WTO commitments related to VATS
Legally speaking, when acceding to the WTO, China only committed to opening a select number of VATS to foreign investors, which includes categories B21, B23, B26 and part of B25. Foreign investment is further limited as foreign businesses may hold no more than 50 per cent of the equity in VATS.

VATS and its WTO commitment breakthroughs
With recent economic development and the need to bring in more outside investment, China has gone on to further open up VATS to foreign investors by issuing several recent regulations.

1. The Ministry of Industry and Information Technology of the People’s Republic of China (MIIT) announced that the limitation on foreign equity in a foreign-invested enterprise (FIE) that does online data processing (limited to for-profit e-commerce websites) would be removed. This means that foreign investors are now allowed to set up wholly foreign-owned enterprises (WFOE) that operate third party e-commerce platforms.
2. In 21 pilot project cities,[3] foreign investors may now establish offshore call centres with no limitation on the amount of owned equity.
3. More VATS are also open to foreign investment in the Shanghai Free Trade Zone (Shanghai FTZ):

• App stores that operate under B25 information services, B24 call centres, B22 domestic multi- party communications services, B14 internet access services (ones that are limited to providing internet access services to users), and B13 domestic internet protocol virtual private network services are open to foreign investment in the Shanghai FTZ, with no limitations on foreign equity percentage;
• Limitations on foreign equity for FIEs engaged in B23 storage and forwarding have been removed.

4. Breakthroughs based on the Closer Economic Partnership Arrangement (CEPA) allow qualified Hong Kong and Macau service providers to invest in more China-based VATS.

Some EU SMEs may wonder if they can invest in VATS by purchasing the equity of a qualified Hong Kong or Macau service provider. While there is no explicit legal provision on this, in practice, MIIT and its local branches may ask the Hong Kong and Macao investor to submit the equity structure on which the decision for the licence approval will be based. Since there is no legal foundation for why MIIT does this, it is possible that MIIT may halt this practice. Prior consultation with MIIT and its local branches is suggested for specific cases.

Potential approaches by EU SME investors
When an EU SME would like to establish an FIE and create a website in order to provide an online service in China, it may do the following:

1. An important first step is to check what it wants to do against the revised Classification Catalogue of Telecommunications Services to see if the proposed online service falls within the scope of VATS.
2. If a proposed service is categorised as a VATS, further analysis should be undertaken to see what specific VATS it is and what VATS licence should be obtained.
3. After the SME clarifies that the proposed service is considered a VATS, it should check the Catalogue Guiding Foreign Investment in Industry to see if that service area is open to foreign investment, in accordance with China’s commitments to the WTO.
4. If it is not open to foreign investment, check the industry specific exceptions such as offshore call centre services and for-profit e-commerce websites.
5. Last but not least, for some online services provided in China, besides VATS licensing requirements, there are additional requirements to be met or prohibitions/limitations on foreign investment.

• Foreign investors are prohibited from investing in internet culture services, with the exception of music. Not only MIIT but also the Ministry of Education of the People’s Republic of China have expressly required Hong Kong and Macau investors to submit their equity structures to ensure there is no foreign investment occurring. So far, there is no channel for EU SME investors to invest in FIEs that engage in online gaming operations in China, either directly or indirectly.

In addition to the already discussed issues with VATS in China, there are other issues regarding foreign investment in China. Additional information on e-commerce in China needs to be provided, along with clarification on the sale of goods and services. Problems related to operational performance by foreign investors and the requirements for registered capital in FIEs also needs to be taken into account.

[1] For the purpose of this article “China” refers to mainland China as Hong Kong and Macao have different legal systems.
[2] B11, B12, B13, B14, B21, B22, B23, B24, B25 and B26.
[3] The 21 pilot cities include Beijing, Tianjin, Shanghai, Chongqing, Dalian, Shenzhen, Guangzhou, Wuhan, Harbin, Chengdu, Nanjing, Xi’an, Jinan, Hangzhou, Hefei, Nanchang, Changsha, Daqing, Suzhou, Wuxi, Xiamen.

The EU SME Centre in Beijing provides a comprehensive range of hands-on support services to European small and medium-sized enterprises (SMEs), getting them ready to do business in China.

Our team of experts provides advice and support in four areas: business development, law, standards and conformity and human resources. Collaborating with external experts worldwide, the centre converts valuable knowledge and experience into practical business tools and services easily accessible online. From first-line advice to in-depth technical solutions, we offer services through Knowledge Centre, Advice Centre, Training Centre, SME Advocacy Platform and Hot-Desks.

The centre is funded by the EU and implemented by a consortium of six partners – the China-Britain Business Council, the Benelux Chamber of Commerce, the China- Italy Chamber of Commerce, the French Chamber of Commerce in China, the EUROCHAMBRES, and the European Union Chamber of Commerce in China.

To learn more about the centre, visit website www.eusmecentre. org.cn