Regulation of Telecommunications Sector in China: Overview Ⅱ
Regulatory framework for foreign investment in telecoms
WTO commitments
Equity restrictions under domestic legal regime
Capitalisation and Qualification requirements
Key steps in the approval process for a FITE
Approval for establishment of a FITE: diagram
Exceptions to foreign shareholding cap
E-commerce business open to 100% foreign ownership
Relaxation of policies for offshore call centre services
Preferential policies under CEPAs
Preferential policies in Shanghai FTZ
Variable interest entities (VIE) structure
An overview of the regulatory regime governing the telecommunications sector in China and the regulation of foreign investment in this sector. This note also provides an overview of the corresponding preferential policies that apply in certain special investment zones (such as the Shanghai FTZ) and under CEPA between China and each of the Hong Kong or Macau Special Administrative Region.
Regulatory framework for foreign investment in telecoms
Not all telecoms services are fully open to foreign investment and foreign investors may only operate those telecoms services in China that are specifically permitted. All other telecoms services are off-limits to foreign operators.
The telecoms services in which foreign investors may participate were determined when China joined the World Trade Organisation (WTO) in 2001. In practice, the situation on the ground is generally more restrictive than the WTO rules would suggest.
Generally, China allows qualified operators from Hong Kong and Macau to participate in a wider range of telecoms services than other foreign investors (see Preferential policies under CEPAs).
For those telecoms services in which foreign investment is permitted, the general rules on the operation of telecoms in China such as the 2000 Telecoms Regulations and the 2017 Telecoms Licensing Measures apply.
In addition, foreign investors must comply with the provisions of the 2008 Foreign-Invested Telecoms Regulations, which specifically deal with foreign investment in this sector.
WTO commitments
When China joined the WTO, it only committed to open a limited number of specified telecoms services to foreign investment. The following table lists the BTS and VATS that were opened up to foreign investment generally (Annex 9, Schedule of Specific Commitments on Services List of Article II MFN Exemptions, Protocol on the Accession of the People’s Republic of China 2001 (中华人民共和国服务贸易具体承诺减让表第2条最惠国豁免清单附件9):
Equity restrictions under domestic legal regime
Foreign investors are generally not permitted to establish a wholly owned telecoms operator in China. With some exceptions (see Exceptions to foreign shareholding cap), foreign investors must establish a FITE in the form of an EJV with a Chinese investor. The aggregate share of equity that may be held by foreign investors in a FITE is capped as follows:
• BTS (other than specific BTS services that are regulated as VATS): 49%.
• VATS: 50%.
(Article 6, 2008 Foreign-Invested Telecoms Regulations.)
Capitalisation and Qualification requirements
The capitalisation requirements of a FITE are the same as those for a domestic Chinese telecoms provider (see Capitalisation requirements).The investors in a FITE must satisfy specified qualification requirements, which differ depending on whether it engages in BTS or VATS.
The principal Chinese investor is that who makes the largest capital contribution among all the Chinese investors and whose capital contribution accounts for not less than 30% of the total capital contributions of all the Chinese investors (Article 8, 2008 Foreign-Invested Telecoms Regulations).
The principal foreign investor is that who makes the largest capital contribution among all the foreign investors and whose capital contribution accounts for not less than 30% of the total capital contributions of all the foreign investors (Article 9, 2008 Foreign-Invested Telecoms Regulations).
Key steps in the approval process for a FITE
Like other telecoms operators, FITEs must obtain a telecoms licence from the competent telecoms authority. The MIIT is responsible for approving the establishment of a FITE and the issuing of a telecoms licence to a FITE (see Approval for establishment of a FITE: diagram).
If the total investment amount of the foreign investment project is USD300 million or more, a central level project approval from the NDRC is required before the MIIT’s issuance of its approval for foreign investment in a FITE (Article 11, Catalogue of Investment Projects Subject to Government Verification and Approval (2016 Version)). In case the NDRC project approval process is triggered, the MIIT approval timeline below can be extended for a 30-day period. (For more information on the 2016 investment projects catalogue, see Legal update, NDRC clarifies verification and record-filing of fixed asset foreign investment projects.)
For an overview of the government approvals and business registrations that a foreign investor must make to establish a business in China, see Practice note, Establishing a China business.
Approval for establishment of a FITE: diagram
The times indicated for each step in the approval process are not cast in stone and may be shorter or longer depending on the particulars of each project, and the sequence of each step is illustrated in the diagram below (Articles 11-12 and 15-16, 2008 Foreign-Invested Telecoms Regulations).
Exceptions to foreign shareholding cap
There are exceptions to the foreign shareholding cap imposed on the telecoms sector, including relaxed policies applicable to:
• E-commerce.
• Offshore call centre services.
• Hong Kong and Macau service providers under CEPA.
• Shanghai FTZ.
E-commerce business open to 100% foreign ownership
Under the 2003 version of the telecoms catalogue, online data processing and transaction processing services includes banking, ticket purchasing, online auction and electronic payment processing services. These cover the business activities of well-known e-commerce operators, such as Taobao.com, yhd.com and JD.com. As a result, these e-commerce operators were subject to the 50% foreign shareholding cap before the liberalisation measures adopted since 2015.
On 13 January 2015, the MIIT issued the Circular of the Ministry of Industry and Information Technology on Liberalizing the Restrictions on Foreign Shareholding Percentages in Online Data Processing and Transaction Processing Business (Operating For-profit E-commerce Business) within the China (Shanghai) Pilot Free Trade Zone 2015 (工业和信息化部关于在中国（上海）自由贸易试验区放开在线数据处理与交易处理业务（经营类电子商务）外资股权比例限制的通告), which permitted up to 100% foreign ownership of operating for-profit e-commerce businesses established within the Shanghai FTZ.
Following the carve out of for-profit e-commerce in the 2015 foreign investment catalogue, the MIIT issued the Notice of the Ministry of Industry and Information Technology on Liberalising Foreign Equity Ratio Limitation on Online Data Processing and Transaction Processing Services (Operating E-commerce) 2015 (2015 E-commerce Circular), which expanded the pilot liberalisation in the Shanghai FTZ nationwide. The immediate impact of the 2015 E-commerce Circular is that foreign investors may engage in operating for-profit e-commerce business anywhere in China without a Chinese partner. In May 2016, MITT approved the first VATS licence for e-commerce business wholly owned by Japanese investors after the 2015 E-commerce Circular.
For a detailed overview of e-commerce in China and the special regime that applies to foreign investment in e-commerce in the Shanghai FTZ, see Article, E-commerce in China.
Relaxation of policies for offshore call centre services
Since the end of 2010, foreign investors may participate in pilot projects in 21 model cities to operate offshore call centres on a wholly owned basis. The 21 model cities are Beijing, Tianjin, Shanghai, Chongqing, Dalian, Shenzhen, Guangzhou, Wuhan, Harbin, Chengdu, Nanjing, Xi’an, Jinan, Hangzhou, Hefei, Nanchang, Changsha, Daqing, Suzhou, Wuxi and Xiamen (Encouraging the Accelerated Development of the Service Outsourcing Industry and Simplifying the Approval Procedure for the Pilot Program of Foreign-invested Offshore Call Centers 2010 (工信部关于鼓励服务外包产业加快发展及简化外资经营离岸呼叫中心业务试点审批)).
The relaxation of these policies is only available for offshore call centre services, that is, services where the end user and the customer are both based outside China. FITEs that participate in the pilot projects can be approved by the Local Communications Bureau of the relevant model city rather than by the MIIT.
Preferential policies under CEPAs
China entered into the CEPA: Agreement on Trade in Services (服务贸易协议) with Hong Kong and Macau respectively (each, a CEPA Trade in Services Agreement) in 2015.
Under each CEPA Trade in Services Agreement, qualified Hong Kong and Macau service providers are allowed to set up joint ventures or wholly-owned enterprises to provide the following VATS within mainland China:
• Online data processing and transaction processing services (restricted to operating for-profit e-commerce business websites only).
• Multi-party communications services.
• Store and forward services.
• Call centre services.
• Internet access services (restricted to provide Internet access services to users).
• Information services (restricted to application stores only).
Qualified Hong Kong and Macau service providers are also allowed to set up joint ventures to provide the following VATS within mainland China, and the shareholding ratio of Hong Kong or Macau investors in such joint ventures is capped at 50%:
• Online data processing and transaction processing services (excluding operating for-profit e-commerce business websites).
• Mainland internet protocol virtual private network services (that is, the domestic internet protocol virtual private network services under the 2015 Telecoms Catalogue).
• Internet data centre services.
• Internet access services (excluding services provided to internet users).
• Information services (excluding application stores).
In addition, each CEPA Trade in Services Agreement allows contractual service providers employed by Hong Kong and Macau service suppliers, in the mode of movement of natural persons, to provide the following telecoms services in mainland China:
• Online data processing and transaction processing (confine to operating for-profit e-commerce business websites only).
• Call centre services.
• Internet access services.
(Table 3, Annex 1 of each CEPA Trade in Services Agreement.)
The Decision to Temporarily Adjust the Relevant Administrative Examination and Approval and Special Market Access Administrative Measures on Hong Kong and Macau Service Suppliers in Mainland China 2016 issued by State Council temporarily adjusts the restrictions on shareholding cap, approval and access requirements for VATS sectors for qualified Hong Kong and Macau service suppliers. The MIIT subsequently issued the Notice on Provision of Telecommunication Services by Hong Kong and Macau Service Suppliers in Mainland China (关于港澳服务提供者在内地开展电信业务有关问题的通告), which mirrors the provisions of the CEPA Agreement and provides further operating details.
Preferential CEPA policies applicable in Guangdong province
Hong Kong and Macau service providers can distribute fixed or mobile telephone cards in Guangdong Province that can only be used in Hong Kong (excluding mobile satellite phone service cards) (Table 3, Annex 1 of each CEPA Agreement).
Qualifying as a Hong Kong or Macau service provider under CEPA
For a Hong Kong or Macau service provider to qualify for the benefits under CEPA, it must meet the following conditions:
• It is lawfully incorporated or established in Hong Kong or Macau.
• It holds any licences or permits required by law to provide the services in Hong Kong or Macau.
• Its nature and scope of business in Hong Kong or Macau are commensurate with the services to be provided in China.
• It pays profits tax in Hong Kong or Macau.
• It has at least three years substantive operations of in Hong Kong or Macau.
• It owns or leases premises in Hong Kong or Macau commensurate with its scope and scale of business.
• At least 50% of the staff is local.
Preferential policies in Shanghai FTZ
Within the Shanghai FTZ, different (that is, less restrictive) rules apply than in the rest of China to many industries.
Foreign businesses can take advantage of the preferential policies by setting up subsidiaries in the Shanghai FTZ or transacting business through the FTZ. (For more detail, see Practice note, China (Shanghai) Pilot Free Trade Zone: overview.)
In addition to general improvements in the regime for establishing a business inside the Shanghai FTZ, the relaxation of legal restrictions on foreign participation in VATS, in the Shanghai FTZ allows foreign operators to hold higher stakes in, obtain a VATS licence more quickly, and reduce their initial capital outlay by more than in places outside the zone. (For more details, see Checklist, Comparison of FIEs in the China (Shanghai) Pilot Free Trade Zone and Rest of China and Qualification requirements for telecoms licences.)
Relaxation of foreign shareholding cap
The following table details the raises in the percentage of the permitted foreign equity share in specified VATS.
(Article 2, Opinions of the Ministry of Industry and Information Technology and the Shanghai Municipal People’s Government on Further Liberalizing Value-added Telecommunications Services within the China (Shanghai) Pilot Free Trade Zone 2014.)
Simplification of licensing procedure
The procedures for the granting of VATS licences are simplified in the Shanghai FTZ. The following table compares the key requirements to obtain a VATS licence inside and outside the Shanghai FTZ.
These make the Shanghai FTZ an attractive location for foreign investors seeking an investment in VATS in China in particular since the zone can be used to reach end-users throughout China.
Variable interest entities (VIE) structure
Because of the difficulty of securing a VATS licence and the many restrictions this involves, some foreign investors who wish to invest in VATS businesses in China opt to make their investment through an alternative investment structure, usually known as a variable interest entity (VIE).
The key feature of the VIE structure is that the foreign investor relies on a contractual arrangement rather than direct equity investment to acquire and control a subsidiary or subsidiaries operating the VATS business in China. The basis for the control is a suite of contracts (referred to as the VIE contracts) entered into between the foreign investor and the Chinese shareholder(s) (known as the nominees) of the subsidiaries. The VIE contracts allow the foreign investor to control and extract revenue from the subsidiaries without directly holding their equity.
The structure is very popular in the VATS sector as it provides foreign operators access to China’s telecoms sector while avoiding the restrictions applicable to foreign investment. However, the VIE structure exists in a legal grey area for the reasons (amongst others) that it may be deemed as a scheme avoiding the law.
For more details on VIE structures, see Practice note, Variable interest entity (VIE) structures in China.
Proposed changes to China’s foreign investment regime may affect the validity of VIE structures (see Legal update, Draft Foreign Investment Law open for comment until February 17).
作者简介：
合伙人 上海办公室
业务领域：收购兼并, 资本市场/证券, 合规/反腐败，信息技术、电信、传媒与娱乐
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