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Editorial

Several Questions regarding ICP/EDI

August 2019 - Corporate & Commercial. Legal Developments by V&T Law Firm.

More articles by this firm.

Author: Jack KOO, Partner of V&T Law Firm, Email: j.will.koo@vtlaw.cn

Dear reader,

Many people in practice are sort of confused about the definitions of ICP and EDI, and have some un-answered queries about related issues. We hereby submit this Memo regarding our detailed answers or analysis on the captioned for your reference.

1.        Questions Raised by PRCV set forth below (“Questions”):

As per our telephone discussion and exchange of e-mails before during the middle of this April, it is understood that PRCV seeks to have us answer the following questions and provide related advices from legal perspectives, where applicable, which questions are set out as follows:

(1)     What is ICP/EDI? Who needs the relevant license?

(2)     What are the currently applicable laws and regulations on ICP/EDI for foreign investors?

(3)     What procedure and how long does it take for a start-up (already with related license to operate value-added telecommunication businesses) to renew its license in the case of receiving foreign investment?

(4)     Are there any legal ways not to undergo the procedure as stated in the Question (3)?

(5)     Is there anything else worthy of being considered as to ICP/EDI?

2.        Analysis or Answers on the aforementioned Questions:

(1)     As regards Question (1): What is ICP/EDI? Who needs the relevant license?

ICP stands for “Internet Content Provider”, and when it comes to the “ICP License” under the PRC law and also within the Chinese business context (the “ICP License”) it generally refers to a license granted by the relevant competent telecommunications bureau of the province, autonomous region or centrally-administered municipality (the “Telecommunications Bureau”) or the Ministry of Industry and Information Technology (the “MIIT”) to engage in the business of provision of internet-based information services for payment  (with “commercial nature”) within the scope of a province, an autonomous region or a centrally-administered municipality or on a “Cross-locality” basis (the “ICP Business”), and it shall be borne in mind that such ICP business is merely a sub-category of the “Value-added Telecommunications Business” (generally meaning making use of public network infrastructure to provide telecommunications and information services, as defined and categorized below in detail).

In practice, it is not unusual for one to confuse ICP Business with EDI or even the broader concept of Value-added Telecommunications Business, but the three definitions (the “Three Definitions”) are different in terms of extent of content, or in nature.

For your information, as per Announcement of the Ministry of Industry and Information Technology on Promulgating the Classification Catalogue of Telecommunications Services (Version 2015)(promulgated by MIIT and effective since March 1, 2016) (the “Catalogue”), Value-added Telecommunications Business, a type “B” telecommunication business (as opposed to the type A “Basic Telecommunication Business”) is the largest concept among the Three Definitions and is categorized into the following categories: B11 Internet data center services, B12 Content delivery network services, B13 Domestic Internet protocol virtual private network services, B14 Internet access services and B2 Category II Value-added Telecommunications Services (with such B2 Category II being sub-categorized into B21 Online data processing and transaction processing services, B22 Domestic multi-party communication services, B23 Store-and-forward services, B24 Call center services, B25 Information services and B26 Code and regulation conversion services).

In summary, the ICP Business is a sub-concept of the Value-added Telecommunications Business, and it is basically defined by the Catalogue (as defined below) as the “B25 Information services” (referring to “the information services provided for users through the public communication network or the Internet by relying on the information collection, development, processing and information platform construction”, as provided for in the Catalogue), which information services mainly include “information release platform and transmission services, information search and inquiry services, information community platform services, instant information interaction services, information protection and processing services, etc.”.

Pursuant to the currently effective Telecommunications Regulations of the People's Republic of China (2016 revision) (the “TR”) and the Administrative Measures on Telecommunications Business Licensing (promulgated by MIIT and becoming effective as of September 1, 2017 ) (the “Licensing Measures”, referred collectively with the TR as the “Telecommunications Business Permits Regulations”), enterprises engaging in ICP Business or B25 Information services shall obtain a licence issued by the competent telecommunications administrative authorities, and such licence is titled as either the "Cross-locality Value-add Telecommunications Business Licence" or the "Value-add Telecommunications Business Licence" for operation within the scope of a province, autonomous region, or centrally-administered municipality, as applicable.

On the other hand, as regards the “EDI” specifically inquired by PRCV, which by definition stands for “Electronic Data Interchange”, it shall be noted that the concept of of “B21 Online data processing and transaction processing services” (the “B21 Services”) under the Catalogue mostly resembles or overlaps with what EDI means within the relevant business context in the PRC. Under the Catalogue, the B21 Services are defined as “the services of online data processing and transaction/affair processing provided for users through public communication networks or the internet, by utilizing various kinds of data and affair/transaction processing application platforms that are connected to public communication networks or the internet”. It is provided in the Catalogue that “the services of online data processing and transaction processing include transaction processing services, electronic data exchange services and network/electronic equipment data processing services”.

By the same token, pursuant to the Telecommunications Business Permits Regulations”, enterprises engaging in B21 Service (or phrased as EDI services) shall obtain a license issued by the competent telecommunications administrative authorities, and such license is titled as either the "Cross-locality Value-add Telecommunications Business License" or the "Value-add Telecommunications Business License" for operation within the scope of a province, autonomous region, or centrally-administered municipality, as applicable.

(2)     As regards Question (2): What are the currently applicable laws and regulations on ICP/EDI for foreign investors?

Apart from the Telecommunications Business Permits Regulations as well as any other generally-formulated laws and regulations on ICP/EDI matters, the major regulations on this subject matter are the Provisions on the Administration of Foreign-invested Telecommunication Enterprises (2016 Revision) (promulgated by the State Council and becoming effective as of February 6, 2016) (the “FITE Provisions”). The provisions of the FITE Provisions which we identify as among the most significant are as follows:

As regards registered capital, the minimum registered capital of foreign-funded telecommunications enterprises operating value-added telecommunications businesses across provinces, autonomous regions or centrally-administered municipalities shall be RMB10 million; and, the minimum registered capital of foreign-funded telecommunications enterprises operating value-added telecommunications businesses within a province, an autonomous region or a centrally-administered municipality shall be RMB1 million.

In respect of the capital contribution ratio of foreign investors in a foreign-funded telecommunications enterprise operating value-added telecommunications businesses, generally, it is provided in the FITE Provisions that the capital contribution ratio of foreign investors in a foreign-funded telecommunications enterprise operating value-added telecommunications businesses (including wireless paging business in basic telecommunications businesses) shall not exceed 50% ultimately. It shall be noted, however, that the Special Administrative Measures (Negative List) for Foreign Investment Access (Edition 2018) (the “Negative List”), which were promulgated later than FITE Provisions, have provided more specifically for the limitation or cap on the sharing percentage of equity interest held by foreign investors in the value-added telecommunications businesses. In detail, in relation to “Internet and related Services” as provided for in the Negative List, the Negative List has explicitly prohibited foreign investment in the businesses of internet news content services, internet publication services, internet video-audio program services, internet culture operation (except for music) and internet public publication of information service. In the case of value-added telecommunication services, the Negative List provides that the sharing percentage of equity interest held by foreign investors in the value-added telecommunications businesses shall not exceed 50% (except for the electronic business). That is to say, when it comes to B21 Service (or phrased as EDI services) that is in connection with the electronic business which essentially involves online data processing and transaction processing services, the Negative List has lifted or rescinded the 50% cap on the sharing percentage of equity interest held by foreign investors in the value-added telecommunications businesses in connection with electronic business (such as Taobao, for example). In addition, there are some specific preferential policies or rules adopted or implemented in Shanghai Free Trade Zone that lift or rescind some limitations or caps on the sharing percentage of equity interest held by foreign investors in the value-added telecommunications businesses in connection with some sub-category of B25 Information services (such as APP shop businesses, in which case foreign investors’ shareholding may reach up to 100%).

It is worth noting that Article 10 of the FITE Provisions provides that the main foreign investor of a foreign-funded telecommunications enterprise operating value-added telecommunications businesses (i.e., the foreign capital contributor whose capital contribution is highest among all the foreign investors and constituting 30% or more of the total capital contribution of all the foreign investors) (the “Main FI”) shall have a good track record and operational experience in value-added telecommunications businesses.

(3)     As regards Question (3): What procedure and how long does it take for a start-up (already with related licence to operate value-added telecommunication businesses) to renew its licence in the case of receiving foreign investment?

Article 28 of the Licensing Measures provides that, where a telecommunications business operator or its authorized company undergoes merger or division and change in shareholders etc. which result in change of operating entity, or in the event of change of business scope, an application shall be submitted to the original licence-issuing authorities within 30 days from the date of decision by the company to do or transact the foregoing matters. Furthermore, under this Article 28, any such change shall not lead to violation of the contentions or criteria to operate the relevant value-added telecommunication businesses under the Article 6 of the Licensing Measures, related provisions of the FITE Provisions (in the case of being subject to licensing requirements imposed on foreign-invested telecommunication enterprises, where applicable) and any other applicable legal rules.

According to the Service Guidance on Foreign Investment in Telecommunication Businesses (promulgated by the Information Communication Development Bureau of the MIIT and becoming effective as of April 8, 2019) (the “Guidance on Foreign Investment in Telecommunication Businesses”), as regards the Question (3), the applicant enterprise shall first determine whether its situations fall within the scope of application of rules of the Notification as to Applicable Procedures of Application for Operation of Telecommunication Businesses by Domestic Company Directly Listed Overseas (the “Applicable Procedures of Application for Operation of Telecommunication Businesses by Domestic Company Directly Listed Overseas”) (An exception for the application of the Review and Approval Procedure under the FITE Provisions is enshrined in the Applicable Procedures of Application for Operation of Telecommunication Businesses by Domestic Company Directly Listed Overseas, which provides that, in the case of a H-share directly-listed company with the sharing percentage of foreign equity being lower than 10% and with a shareholder holding the largest share of stock being a Chinese investor, for such company or its domestic subsidiary to operate telecommunication businesses in the PRC, related laws and regulations applicable only to domestic enterprises shall apply.). If falling within the scope, the review and approval procedures as provided in the Licensing Measures for companies without foreign investment shall apply; if not, the review and approval procedures as set out in the FITE Provisions shall apply to such applicant enterprise.

Therefore, in the case of the applicant enterprise to receive foreign investment is a start-up, as opposed to a overseas directly-listed company, the review and approval procedures of licensing as set out in the FITE Provisions (the “Review and Approval Procedure”) shall apply to such an applicant enterprise that is intended to receive foreign investment resulting in the change of shareholder or equity structure thereof.

The first step of the Review and Approval Procedure is concerned with obtaining the “Approval Opinion for Foreign Investment in Telecommunication Business”. There shall be two scenarios for the first step of the Review and Approval Procedure in terms of whether related value-added telecommunication services are provided within a province or on a cross-province basis. In the first scenario, according to Article 11 of the FITE Provisions, for establishment of (or, conversion into) a foreign-funded telecommunications enterprise to operate value-added telecommunications businesses (in connection with ICP/EDI businesses, in the present case) across provinces, autonomous regions or centrally-administered municipalities, the main Chinese investor of the start-up applicant shall submit an application with required documents to the industry and information technology authorities of the State Council.  Upon receipt of an application, the industry and information technology authorities of the State Council shall examine the relevant documents stipulated in the preceding paragraph. In the case of an application for value-added telecommunications businesses, examination shall be completed within 90 days and a decision on approval or non-approval shall be made. An “Approval Opinion for Foreign Investment in Telecommunication Business” shall be issued to successful applicants; unsuccessful applicants shall be notified in writing and the reason shall be stated.  Or, alternatively, in the case of establishment of (or, conversion into) a foreign-funded telecommunications enterprise to operate value-added telecommunications businesses (in connection with ICP/EDI businesses, in the present case) within a province, an autonomous region or a centrally-administered municipality, the main Chinese investor of the state-up applicant shall submit an application with required documents to the telecommunications authorities of the province, autonomous region or centrally-administered municipality. The telecommunications authorities of the province, autonomous region or centrally-administered municipality shall issue an opinion within 60 days from receipt of an application. In the case of issuance of a consent opinion, the application shall be forwarded to the industry and information technology authorities of the State Council; in the case of issuance of a non-consent opinion, the applicant shall be notified in writing and the reason shall be stated. The industry and information technology authorities of the State Council shall complete examination and decide on approval or non-approval of the application for which a consent opinion is issued within 30 days from receipt of the application documents forwarded by the telecommunications authorities of the province, autonomous region or centrally-administered municipality. An “Approval Opinion for Foreign Investment in Telecommunication Business” shall be issued to successful applicants; unsuccessful applicants shall be notified in writing and the reason shall be stated.

The second step of the Review and Approval Procedure is concerned with obtaining the “Approval Certificate for Foreign Investment Enterprises” to be issued by the commerce authorities of the State Council or the commerce authorities of the People's Government of the province, as applicable. Pursuant to Article 15 the FITE Provisions, for establishment of (or, conversion into) a foreign-funded telecommunications enterprise to operate value-added telecommunications businesses across provinces, autonomous regions or centrally-administered municipalities, the main Chinese investor shall present the “Approval Opinion for Foreign Investment in Telecommunication Business” to, and submit the contract and articles of association of the proposed foreign-funded telecommunications enterprise to, the commerce authorities of the State Council; whereas, for establishment of (or, conversion into) a foreign-funded telecommunications enterprise to operate value-added telecommunications businesses within a province, an autonomous region or a centrally-administered municipality, the main Chinese investor shall present the “Approval Opinion for Foreign Investment in Telecommunication Business” to, and submit the contract and articles of association of the proposed foreign-funded telecommunications enterprise to, the commerce authorities of the People's Government of the province, autonomous region or centrally-administered municipality.The commerce authorities of the State Council or the commerce authorities of the People's Government of the province, autonomous region or centrally-administered municipality shall complete examination and decide on approval or non-approval within 90 days from receipt of the contract and articles of association of the proposed foreign-funded telecommunications enterprise. An "Approval Certificate for Foreign Investment Enterprises" shall be issued to successful applicants; unsuccessful applicants shall be notified in writing and the reason shall be stated.

The last step is for the main Chinese investor of a foreign-funded telecommunications enterprise (the start-up enterprise, in the present case) shall present the "Approval Certificate for Foreign Investment Enterprises" to complete registration formalities with the competent administration for industry and commerce, and then present the "Approval Certificate for Foreign Investment Enterprises" and business license to apply to the industry and information technology authorities of the State Council for a “Telecommunications Business License”(value-added telecommunication business license) .

As regards the time frame for successfully going through the above procedures and obtaining the related license, it is truly subject to case-by-case determination and is also subject to related governmental authorities’ internal processing. Despite the foregoing, related mandatory time limit set out above would most usually be abided by related governmental authorities.

(4)     As regards Question (4): Is there any legal ways not to undergo the procedure as stated in the Question (3)?

a.       Some may propose the idea of circumventing the Review and Approval Procedure in the case of an enterprise (a start-up enterprise, in the present case) (other than a overseas directly-listed company) receiving foreign investment resulting in the application of the FITE Provisions by having a company incorporated in the PRC with immediate or direct shareholder being established in the PRC but with direct or indirect foreign investment or foreign equity interest.  But the problem is that during the process of applying for the “Telecommunications Business License” (value-added telecommunication business license), the applicant must submit the applicant’s capitalization/equity-holding table that is required to reveal and traced to any existing foreign natural person, legal person incorporated overseas or other foreign organization (such as trust or charity foundation). And, as per related provisions of the Licensing Measures and the FITE Provisions, in the case of provision of false or forged qualification certificate(s) or confirmation document(s) to obtain approval for establishment of a foreign-funded telecommunications enterprise, the approval shall be void, and the industry and information technology authorities of the State Council shall impose a fine ranging from RMB200,000 to RMB1 million and revoke the “Telecommunications Business License”; and the commerce authorities which is the original issuing authority of the "Approval Certificate for Foreign Investment Enterprises" shall revoke the “Approval Certificate for Foreign Investment Enterprises”. Thus, the legal risks involved are huge and gross.

b.      One largely conceivable and legally feasible way to not to undergo the Review and Approval Procedure in the case of an enterprise (a start-up enterprise, in the present case) (other than a overseas directly-listed company) receiving foreign investment resulting in the application of the FITE Provisions is to have the start-up enterprise structured as part of VIE structure, an operation company (the “OPCO”) with license to operate ICP/EDI businesses and without any direct or indirect equity-interest thereof held by foreign investor, with a foreign-invested enterprise controlling the profits, voting power and the corporate control of the OPCO. Admittedly, the VIE structure is to some extent legally controversial in the sense that there exists suspension that such structuring is intended for “using legal form to conceal illegal goals” (circumventing limitations on admission of foreign investment). But it is also ture that the VIE structure is still widely adopted, with the implicit consent or inactive response by related competent governmental authorities in the PRC.

(5)     As regards Question (5): Is there anything else worthy of being considered as to ICP/EDI?

a.       As mentioned above, during the process of applying for the “Telecommunications Business License” (value-added telecommunication business license), the applicant must submit the applicant’s capitalization/equity-holding table that is required to reveal and traced to any existing foreign natural person, legal person incorporated overseas or other foreign organization (such as trust or charity foundation). According to our communication with some staff working with the Telecommunications Bureau or the MIIT, in the case of a company operating ICP/EDI businesses and proposed to get listed on the A-share stock exchange which has A-share listed shareholder, related governmental authorities only require that the top 10 shareholders (in terms of shareholding in such listed company) should be domestic companies in nature, and would not pay attention to other shareholders thereof.

b.      Another issue worth being noted is concerned with the statutory requirement as provided in the FITE Provisions and the Guidance on Foreign Investment in Telecommunication Businesses that, in the case of foreign investment in value-added businesses and application for related license, the Main FI shall have a good track record and operational experience in value-added telecommunications businesses. According to our communication with some staff working with the Telecommunications Bureau or the MIIT, such foreign investor’s pre-existing investment in value-added telecommunications businesses may probably suffice for this requirement, subject to case by case determination by the relevant governmental authorities. Thus, it is highly recommended for related applicant to consult with the competent Telecommunications Bureau or the MIIT in advance before formally submitting related application materials.

We sincerely hope the above is helpful. We believe that we may better structure and carefully plan your prospective transaction once we know more facts of some potential deal.