FOREIGN INVESTMENT COMPLIANCE IN VALUE-ADDED TELECOMMUNICATIONS SERVICES

Chinese Government imposes restrictions on the entry of foreign investment into the value-added telecommunications market, however, the threshold for entry of foreign investment is gradually lowered.

1. Main Categories of Telecommunications Services

According to the Classification Catalogue of Telecommunications Services (2019 Edition) issued by the Ministry of Industry and Information Technology (“MIIT”), telecommunications services are mainly classified as follows:

According to the report “Development Trend of Foreign-Invested Telecommunications Enterprises (2019)” issued by the China Academy of Information and Communications Technology, as at the end of 2019, a total of 191 foreign-invested telecommunications enterprises have obtained the approvals, and their services are as follows:

2. The Current Policies on Value-added Telecommunications Services

On June 30, 2019, the National Development and Reform Commission ("NDRC") and the Ministry of Commerce ("MOFCOM") issued the Special Administrative Measures for Foreign Investment Access (Negative List) (2019 edition) and the Special Administration for Foreign Investment Access to Pilot Free Trade Zones (2019 edition), which abolished the restrictions on foreign investments in the areas of domestic multi-party communications, storage and forwarding, and call center services.

Currently, the wholly foreign-owned enterprises can apply for approvals in the following areas:

(1) EDI Service;

(2) Call Center Service;

(3) Multi-Party Communication Service;

(4) Store-And-Forward Service.

On November 19, 2019, the State Council temporarily adjusted the implementation of the Administrative Provisions on Foreign-Invested Telecommunications Enterprises (hereinafter referred to as “Provisions”) in Beijing. In designated pilot zones in Beijing, it abolished the restrictions on foreign investment ratios in Internet Access Service (ISP) (limited to Internet Access Service for users), which includes Internet access for residential broadband or private line access, building access, and access for broadband operators, etc..

On June 1, 2020, the State Council issued the "Overall Plan for the Construction of Hainan Free Trade Zone". The plan enumerates measures for expansion of communication resources and services opening in the Hainan Free Trade Zone, with particular reference to the opening of value-added telecommunications services and the gradual removal of restrictions on foreign investment ratios.

3. Licensing System for ICP service

ICP (“Internet Content Provider”) service refers to the service of providing information services to users through public communication networks, with assistance of information collection, development, processing and construction of information platforms. ICP service mainly includes information releasing and delivery, information search, instant information interaction, information protection and processing, etc.

Pursuant to the Telecommunications Regulations of the People's Republic of China, the Administrative Measures on Internet Information Services (hereinafter referred to as "Measures"), and  Non-Operational Internet Information Services, China adopts a licensing system for operational Internet information services, and a filing system for non-operational Internet information services.

Common operational ICP service includes:

(1) Paid information downloading service via computer or mobile terminal, such as paid use of music, video, and books;

(2) Information releasing and delivery platform, such as application store, recruitment website, and software download platform;

(3) Information search service, such as Baidu Search, and 360 Search;

(4) Information community platform, such as QQ, YY, and live video streaming platform;

(5) Security software, such as 360 Antivirus, Rising Antivirus, and Kaspersky Antivirus.

The "Measures" clearly stipulate that where an enterprise engages in operational  Internet information services without a license, or provides services beyond the licensing scope, the enterprises will be requested for a rectification within a time limit. If there are any illegal gains, the illegal gains shall be confiscated, and a fine of not less than three times but not more than five times the illegal gains shall be imposed. If there is no illegal income or the illegal income is less than RMB 50,000, a fine ranging from RMB 100,000 to RMB 1 million shall be imposed. If the consequences are serious, the website shall be ordered to be closed.

Although the prerequisites for the obtaining an ICP service license are slightly different in different regions, at least the following conditions should be met for foreign-invested enterprises:

(1) The proportion of foreign investors’ capital contribution in the enterprise does not exceed 50%; 

(2) Major foreign investors have good performance and operation experience in value-added telecommunications service;

(3) The registered capital is no less than RMB 10 million for a foreign-invested enterprise which engages in services nationwide, across provinces, autonomous regions, or municipalities; the registered capital is no less than RMB 1 million for those engages in services within a province, an autonomous region, or a municipality;

(4) There are service development plans and supporting technical scheme;

(5) There are sound network and information security safeguards, including measures to ensure website security, a system to manage the security and confidentiality of general information, and a system to manage the security of user information;

(6) The enterprise shall provide at least three employees with social insurance benefit within one month or three months before the date of application for the license (depending on the region).

When applying for an ICP service license, many foreign-invested enterprises try to evade the restrictions on foreign investment ratios through VIE Structure. However, VIE Structure faces more and more stringent compliance risks in recent years:

(1) In the field of telecommunications services: in July 2006, MIIT issued the "Notice on Strengthening the Management of Value-added Telecommunications services with Foreign Investment", which specifically prohibits foreign investors from illegally operating value-added telecommunications services in China by evading the restrictions on foreign investment ratios through domain name authorization or registered trademark authorization;

(2) In the field of online game operations: in September 2009, the State Administration of Press and Publication, the National Copyright Administration, and the Office of the National Working Group on Combating Pornography and Illegal Publications jointly issued a Notice, to further strengthen the pre-approval of online games and the administration of the approval of imported online games. The Notice stipulates that "foreign investors are prohibited from investing in online game operation services in China in forms of wholly foreign-owned enterprises, equity joint ventures, or cooperative joint ventures. Foreign investors may not, indirectly, through establishing other joint ventures, executing relevant agreements, providing technical support or otherwise, actually control and participate in the online game operation of domestic enterprises.” The Notice clearly prohibits the" protocol control "; 

(3) In the field of security review: in 2011, MOFCOM issued the “Provisions of the Ministry of Commerce on Implementing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors”. The Article 9 of the Provisions states that “For M&A of domestic enterprises by foreign investors, whether such transaction falls within the scope of security review on M&A shall be judged based on the substantial content and actual impact of the transaction. Foreign investors may not substantially evade M&A security review by any means, including but not limited to holding shares on behalf of others, trust, multi-level reinvestment, leasing, loan, control through agreement, overseas transactions and other means. " This provision clearly forbids transferring the interest of the domestic operating entity overseas in the form of VIE.

(4) In the field of antitrust: MOFCOM once listed restrictive conditions in the antitrust review of the case Wal-Mart’s Indirect Acquisition of No.1 Store as follows: “After this transaction is completed, Wal-Mart shall not engage in value-added telecommunications services currently operated by Shanghai Elka E-commerce Co., Ltd through VIE Structure". Although this type of review is limited to antitrust cases, it actually prohibits VIE structure.

(5) In the field of foreign investment supervision: the Foreign Investment Law was implemented on January 1, 2020, under which foreign investment activities covered "foreign investors acquiring shares, equity, property shares, or other similar rights and interests of Chinese domestic enterprises." At present, it is generally believed that the "similar rights" referred to in this law include the VIE Structure.

Team Members

Alice Sun  Partner

E-mail：suntao@zlwd.com

Qi Niu

Trainee attorney

E-mail：niuqi@zlwd.com