Recently, the State Council’s Decision on the Amendment and Abolition of Some Administrative Regulations resulted in substantial amendments to China’s Regulations on the Administration of Foreign Investment in Telecommunications Enterprises (“the Regulations”). The revised Regulations will take effect on 1 May 2022. Although there is no immediate liberalization of the market access, the changes are in line with the overall foreign investment management system and the simplification of the relevant procedures will mean that foreign investors will have more market opportunities in the Chinese telecommunications market in the future.

In this article, we analyze the mode and development trend of foreign investors’ business in China under the framework of the new Regulations, taking into account the common business needs in practice.

I- Legal Framework of ICT/Cloud Services in China

ICT/cloud services cover a wide range of business areas, such as e-commerce, cloud computing, third-party payments, logistics platforms and software services. China’s opening up to foreign investment in this sector follows the liberalization commitments in several international agreements at the international law level, such as the WTO General Agreement on Trade in Services (GATS), RCEP, the US-China Phase One Deal, and the European Union (EU)-China Comprehensive Agreement on Investment (CAI), which may be completed and enter into force in the future. At the domestic level, this is regulated through general laws governing foreign investment access, such as the Special Administrative Measures on Foreign Investment Access (Negative List), and sector-specific laws, such as the Telecommunications Regulations and the Provisions.

In simple terms, foreign investors operating in China with business scope falling within the scope of telecommunications business should apply for relevant licenses in accordance with the Regulations and other relevant laws and regulations, such as the Telecommunications Business Classification Catalogue, before they can commence operations.

In practice, the often-encountered business includes SaaS software services, e-commerce, online medical, conference, education and other platform services etc. There is also a more common situation where companies build their own websites to sell their own products. Whether or not all of these businesses require a telecoms license and under what conditions they can enter the Chinese market is a primary concern for foreign investors in their first steps into the Chinese market.

II- Is a Telecoms License Required?

Based on our practical experience on a number of projects and communication with the relevant authorities, the following elements are taken into account when determining whether a business is a telecommunications business:

1. whether the specific business falls into one or more of the categories of telecommunications business in the Telecommunications Business Classification Catalogue;
2. whether the business is “operational”, such as collecting membership fees and service fees directly from users, publishing advertisements for advertisers and collecting advertising fees, etc.;
3. providing services in China, such as the business entity is registered in China; the website or APP is registered in China for ICP filing, network filing and other procedures; the website server is set up in China, etc.

Take the example of a company building its own website to sell its own products. Normally, the company does not provide information services to third parties through its website and does not charge membership fees or service fees. The online sales are merely a continuation of the off-line sales relationship with the customers. Therefore, it does not fall under the definition and description of telecommunications business in the Telecommunications Business Classification Catalogue and does not require a telecommunications business license.

Take SaaS software services as another example. In many cases, cloud-based software falls under the category of software services, not information services, and therefore does not require a telecoms business license. IaaS and PaaS services, on the other hand, usually require a telecommunications business license.

III- How to Obtain a Telecommunications Business License

Once confirmed that a telecommunications business license is necessary for a certain business in China, restrictions currently in place under Chinese law are as follows.

1. Substantial Restrictions Such as Shareholding Ratios

In principle, according to the Negative List (Version 2021), the liberalization of telecommunications business is “limited to the telecommunications business that China has committed to open up upon accession to the WTO. The shareholding ratio of foreign investors in value-added telecommunications business shall not exceed 50% (except for e-commerce, domestic multi-party communications, store-and-forward category and call center). Basic telecommunications business shall be controlled by Chinese parties “. In other words, the biggest obstacle faced by foreign investors is the issue of shareholding in their investments in China.

Even if foreign investors are willing to follow the legal requirements to reduce their shareholding ratio to 50% or below, in practice, the licensing authorities will exercise total control when foreign investors are involved. According to a March 2022 report by the China Academy of Information and Communications Technology, there are currently 859 foreign-invested enterprises licensed for value-added telecommunications, accounting for 3.1% of the total number of licenses.

In addition, two special types of liberalization situations need to be noted, namely the special preferential treatment for enterprises in the FTZ and Hong Kong and Macau investors (i.e. CEPA investors).

The following table summarizes the licenses required for several common types of value-added telecoms business, the market access and equity ratio restrictions.

2. Application Procedures

The revised Regulations, which will come into effect on 1 May, significantly simplify the procedures of applying for a telecommunications business license. In the spirit of the Foreign Investment Law of 2020 and the reforms implemented since 2016 to improve the business environment, the entire procedure has been reduced to two major steps, i.e. after applying for a business license or change of business license at AMR, one can apply for a telecommunications business license at the Information and Communication Industry Bureau of the MIIT. In practice, the actual time required to obtain a license under the new procedure is yet to be further observed after the implementation of the Regulations.

IV- Business Models Available in the Event That a Telecoms License Cannot be Obtained

If a foreign investor’s project is assessed to require a telecoms license to operate in China, then due to the difficulty of obtaining a license in practice as described above, the investor may consider some alternative routes. For example:

• Providing the relevant services directly from outside China. Under this structure, operationally, it is necessary to consider issues of fund collection, such as whether PSPs can provide services in China; issues of network firewalls, etc.; legally, it is necessary to understand whether data collected in China needs to be stored locally in accordance with Chinese legal requirements, and under what conditions it can be transmitted across borders, etc.
• Partnering with a licensed company in China, which will operate on behalf of the foreign investor. Under this structure, both partners need to regulate the rights and obligations of each party through a series of agreements such as a licensing agreement, a proxy operation agreement, etc. Essentially, the domestic license holder will directly face and charge customers. The foreign investor has less overall control over the business.
• VIE structure. The VIE structure is a model whereby a Variable Interest Entity (VIE) acquires a telecoms business license in China and a subsidiary of the foreign investor is established to obtain control of the VIE through an agreement. Theoretically, the VIE structure could be considered as a “disguised lease, transfer or resale of telecom business license to foreign investors”, and therefore carries certain legal risks.