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Understanding China’s Lifted Regulation for e-Commerce WFOEs Operating in Free Trade Zones

By Tongyu Zhang

In June 2015, the Ministry of Industry and Information Technology (MIIT) published the Notice on Removing Restriction on Foreign Equity Ratios in Online Data Processing and Transaction Processing Business (Operating e-commerce), which allows foreign investors to hold up to 100 percent equity in an e-commerce company. However, it was not until one year later that the first wholly foreign-owned enterprise (WFOE), Heiwado (China) Co., Ltd, a Japanese company, obtained an operational internet content provider (ICP) license from the MIIT. While the Chinese government provides considerable policy support to the e-commerce sector, the specific definition of e-commerce is vague and can lead to a series of problems in practice. For instance, relevant authorities hold a more reluctant attitude towards e-commerce for services than towards commodities transactions.

The e-commerce business model is composed of retailing e-commerce and platform e-commerce. The former indicates a company selling its own goods through its own website, while the latter is an enterprise that uses its own online platform to provide network services to third parties. According to the Ministry of Commerce (MOFCOM), a foreign-invested enterprise providing platform e-commerce services must obtain an ICP License from the MIIT, as such service belongs to online data and transaction processing services of Category I Valued-added Telecommunications Services.

Review of the application requirements in Shanghai

According to a recent research conducted by Dezan Shira & Associates’ Business Advisory Service team, currently, in Shanghai, only WFOEs registered in Free Trade Zone (FTZ) can apply for an ICP license and conduct e-commerce business.

The approval authority of the ICP license is the MIIT and the Shanghai Communications Administration Bureau. If a WFOE registers in the original areas of the Shanghai FTZ (Pudong airport, Waigaoqiao bonded area, Waigaoqiao bonded logistics park and Yangshan port), it is eligible to apply for an ICP license with the Shanghai Communications Administration Bureau. If located elsewhere, it should apply with the State Ministry of Industry and Information Technology. Note that it is not mandatory for a WFOE to apply for an ICP license before formal registration. The license can be applied for after receiving the business license.

In addition to this, the following criteria shall be fulfilled by the WFOE:

  • A minimal registered capital of RMB 1 million;
  • Server(s) located in the FTZ;
  • Experience in the e-commerce field; and,
  • If products intended to be sold via the platform require special vending licenses (such as medications), they should be obtained accordingly.
Comprehensive pilot zones for cross-border e-commerce

Other than the FTZs, the Chinese government has also set up 13 comprehensive pilot zones for cross-border e-commerce, including Hangzhou, Tianjin, Shanghai, Chongqing, Hefei, Zhengzhou, Guangzhou, Chengdu, Dalian, Ningbo, Qingdao, Shenzhen, and Suzhou. In general, by experimenting with new models for technical standards, business procedures and regulatory mechanisms, these pilot zones aim to promote e-commerce nationally. Some critical stages in the process of foreign-invested e-commerce business, such as payment, logistics, customs clearance, tax refund and foreign exchanges, may also benefit from operation of these pilot zones. In addition, each of the pilot zones have their own regional advantages. For example, Zhengzhou is an important transportation hub in the central-eastern part of China, and plays a key role in the ‘One Belt One Road’ strategy. On the other hand, Dalian enjoys more cross-border e-commerce trade with Japan and South Korea due to the city’s proximity.

Key takeaways

Like in many other industries, state policies on e-commerce may come into conflict with the practices of local authorities. Sometimes, these issues can be highly complicated due to the involvement of several different governing authorities and policies, particularly in the cases of FTZs, pilot zones and high-tech parks. Although, theoretically, restrictions on WFOEs involved in e-commerce business has been lightened, it is still difficult for WFOEs to obtain the relevant license. The Chinese government gradually implements new policies by first experimenting in pilot zones; therefore, foreign investors, especially WFOEs, should keep in close contact with the local government, and seek opinions from experienced professionals.

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