China Lifts Restrictions in Value-Added Telecom Services

Welcome everyone to another edition of my China Tech Law Newsletter.? Today I want to share an article I recently co-authored with my colleague Matthew Ding at R&P China Lawyers on the potential opening up of ICP and other related licenses to foreign companies in China.? It’s a topic dear to my heart, and one I’ve written before about on this blog .? Borrowing from the article directly:

Since accession to the WTO over 20 years ago, China has opened its telecom and e-commerce sectors to foreign investment on paper, but in practice it has been a huge challenge for foreign-invested companies to apply for relevant licenses. Whether as a general push to be more receptive to foreign investment or in response to restrictions Chinese e-commerce giants are facing as they expand overseas, new rules discussed in the article present a welcome development to foreign internet businesses. Although details are to be worked out, new entrants could come in to the market while existing operators may take this opportunity to restructure current operations for more direct control.??

Much remains to be seen as to how the rules’ general guidance will be put into practice, as local pilot areas have been instructed to come up with their own implementation rules subject to approval from the central regulator MIIT. Once a system is in place, approvals of individual applications for enterprises in those pilot zones will also be done at the central MIIT agency level, and not by authorities in the pilot zones.

The outcome of this centralized approval process could pan out in one of two ways. On the one hand, where central government approval has been required for licenses in general, this has tended to extend the approval timeline and discourage creative thinking by local government agencies. On the other hand, approvals of internet businesses have always been a cautious endeavor. In our experience, there has been a huge variation from one provincial MIIT to another provincial MIIT on their posture towards what does and does not require, for example, an ICP license.

This variance in turn has created a fair amount of uncertainty for foreign companies to invest and apply for licensing. Having the approval process at the central level should help remove some of that uncertainty. It also clearly shows the central government being aware that while certain VATS categories have been open for foreign enterprises, local approvals have not been granted in practice with administrators either sitting on or denying applications for no clear reason.

As I’ve written about before , Chinese laws especially related to technology are purposely vague, and we’ve developed a way of dealing with this ambiguity over the years.? Historically with respect to ICP licenses, one of the challenges of advising clients has not been whether to apply (in vain), but whether a client should either (1) find a plausible argument why they do not need the license and go ahead to setup a local subsidiary without it, (2) find a local partner to essentially “borrow” their license under a well-trotted but less than ideal path (see the article I co-authored here ), or (3) setup a VIE structure which has its own issues that I discussed here . This challenge is compounded by the fact that while we can point to what domestic companies are obtaining as licenses (available publicly on MIIT’s website), the caveat is that since domestic competitors can get their licenses much more easily, they will naturally take a more inclusive approach to acquire every license they might plausibly need.

Well, okay I’m trying not to get too far ahead of myself because if this change is really made in practice, it would be a significant one, and when sectors open in China its often best to wait to see it to believe it.? ?I’ll take the same approach here, but if the change is real, we’re talking about a great new option for foreign internet businesses in China that takes away a lot of the legal limbo they’ve been operating in previously.? That would be a very welcome development indeed.

Thanks for reading another edition of my China Tech Law Newsletter and see you back here in a week!