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9 Jul 2015

MIIT New Rules on Liberalizing Foreign Investment in the E-Commerce Sector

On 19 June 2015, the Ministry of Industry and Information Technology (the “MIIT”) issued the Circular on Lifting the Foreign Equity Ownership Cap on Businesses Providing Online Data Processing and Transaction Processing Services (E-Commerce Businesses) (《关于放开在线数据处理与交易处理业务(经营类电子商务)外资股比限制的通告》, “Circular 196”). As its name suggests, Circular 196 lifts foreign equity restrictions for entities engaged in online data processing and transaction processing services in the e-commerce sector nationwide. Now, foreign entities may hold up to 100% of the equity interests in entities engaged in such businesses.

Circular 196 is another significant step taken by PRC authorities to gradually liberalize the telecommunications sector. It follows a similar regulation promulgated by the MIIT on 13 January 2015: Circular on Lifting the Foreign Equity Ownership Cap on Businesses Providing Online Data Processing and Transaction Processing Services (E-Commerce Businesses) in the China (Shanghai) Pilot Free Trade Zone (《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》, the “FTZ Circular”). The FTZ Circular also lifted foreign equity restrictions for similar entities in the Shanghai Free Trade Zone (see our newsletter from19 January 2015). Circular 196 now extends the policy initiated by the FTZ Circular nationwide. 

In general, we believe that Circular 196 likely will greatly impact the e-commerce industry as a whole as well as e-commerce foreign investment specifically.

Industry Impact

Circular 196 is likely to impact the e-commerce industry primarily via newly introduced licensing requirements. Currently, self-managed e-commerce entities tend to only make a record filing for the provision of non-commercial Internet Information services (“ICP Filing”), while entities providing non-self-managed e-commerce services – both domestic entities and foreign-invested entities (“FIEs”) – have typically obtained an Internet content provider license (“ICP License”) for the provision of commercial Internet Information services.  

Now however, Circular 196 requires that FIEs engaging in non-self-managed e-commerce services apply for an “online data processing and transaction processing (e-commerce business) license” (“E-commerce License”). At the moment, the prevailing interpretation of Circular 196 by relevant government authorities appears to be that the E-commerce License is to be obtained in lieu of ICP Licenses by FIEs. However, we cannot rule out the possibility that FIEs will not again be required in the future to both an ICP License and an E-commerce License. Particularly because the coverage of the two licenses differs: the E-commerce License is used for e-commerce-related activities, whereas an ICP License relates to Internet information services. Therefore, as FIEs providing non-self-managed e-commerce services also engage in activities historically categorized as Internet information services (i.e., displaying product information, advertising, etc.), it seems plausible that both licenses could be required in the future.

As for domestic entities, interpretations of the impact of the E-commerce License requirement appear uneven. One interpretation is that domestic entities engaging in non-self-management e-commerce services must continue to apply for ICP Licenses, as Circular 196 only applies to FIEs. Another interpretation is that the same requirement should apply to domestic entities, and they should therefore apply for E-commerce Licenses in lieu of ICP Licenses. Other authorities even appear to be considering requiring that domestic enterprises currently in operation with the ICP Licenses to apply for E-commerce Licenses in addition to their ICP Licenses. 

Therefore, to ensure compliance with Circular 196, e-commerce enterprises should evaluate their various e-commerce business lines and communicate with legal counsel and relevant authorities to ensure that they meet new licensing requirements of Circulate 196. 

Foreign Investment Impact

Circular 196 will also impact foreign investment. Circular 196 allows foreign investors to hold up to 100% of the equity interests in an e-commerce entity engaged in online data processing and transaction processing services. In addition, Circular 196 clearly states that foreign investors will still need to comply with the requirements of the Provisions on the Administration of Telecommunication Enterprises with Foreign Investment (issued in 2008, “Circular 534”).

Since the issuance of Circular 534, however, there have only been a few dozen FIEs in the telecommunications sector successfully set up. This is likely due to the lack of specificity of certain requirements, the difficulty in quantifying some standards in Circular 534 (e.g., “excellent performance records and operation experience in value-added telecommunications services business”), and the scrutiny of administrative authorities on foreign investment in telecommunications enterprises. 

If the requirements of Circular 534 remain applicable, then foreign investors may continue to face significant hurdles to engage in the e-commerce sector, despite the liberalization of Circular 196. Therefore, the assistance of professional counsel should be sought to ensure that foreign investors applying to establish an e-commerce entity engaged in online data processing and transaction processing services are fully prepared to handle the nuanced and complex MIIT-approval process.

In general, until additional clarification is provided for the implementation of Circular 196, we would advise companies and investors to seek professional advice and continue to make inquiries with their local branch of the MIIT to gauge and respond to the implementation of Circular 196.

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