Earlier this week, the Ministry of Industry and Information Technology (MIIT) announced that Wholly Foreign Owned Enterprises (WFOE) are allowed to enter the Chinese e-commerce sector. Since January 2015, WFOEs are allowed to apply for a commercial ICP license in the Shanghai Pilot Free Trade Zone, as an experiment. With successful cases, now the MIIT is adopting this change nationwide.
This new regulation is a major breakthrough for foreign investment companies in the e-commerce industry as it was impossible for WFOEs to obtain the commercial Internet Content Provider (ICP) license prior to 2015. With the rapid development of the global e-commerce industry, this approved regulation signifies a substantial advantage for foreign investors in the related area with a wholly owned subsidiary in China.
ICP: what is it and why do WFOEs need it?
The Internet Content Provider (ICP) license is a state-issued registration number that allows organizations to host a website on a Chinese server. It is mandatory for a company to obtain a valid ICP if they wish to have an online presence in China.
There are two types of ICP licenses: the commercial ICP license and the non-commercial ICP license. Before, a WFOE could only obtain the second one, which allowed the WFOE solely to do brand promotion and business development on their website. Now however, a WFOE can also acquire the first type.
Before the release of this new regulation, WFOEs were required to partner up with a Chinese company as the foreign equity ratio in e-commerce business was limited to 50%. The new rule removed the restrictions on foreign equity in an e-commerce business and made it possible to raise the ratio to 100%. The ratio increase will expose WFOEs to more opportunities and benefits in China.
This is good news for foreign investors, and also for foreign listed Chinese e-commerce companies with a “VIE” (variable interest entity) structure. It has been debated that the VIE structure has large legal risks. Now the e-commerce companies may abandon such structure.
Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: firstname.lastname@example.org
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