Shanghai Continues Encouraging Headquarter Enterprises of Multinational Companies

China

On October 28, 2022, the People’s Government of Shanghai Municipality released a Notice on Issuing the Revised Provisions on Encouraging Multinational Companies to Establish Regional Headquarters in Shanghai Municipality (Hu Fu Gui [2022] No. 17) ("2022 RHQ Provisions"). The 2022 RHQ Provisions took effect on November 1, 2022, and have a validity term until October 31, 2027. With their effectiveness, the 2022 RHQ Provisions have simultaneously abolished the previous version of the RHQ provisions, i.e. the Several Opinions on Promotion of the Development of Multinational Companies’ Regional Headquarters in Shanghai (Hu Fu Gui [2019] No. 30) and the Notice on Issuing the Revised Provisions on Encouraging Multinational Companies to Establish Regional Headquarters in Shanghai Municipality (Hu Fu Gui [2019] No. 31) ("2019 RHQ Provisions").

The new provisions aim at further encouraging multinational companies to establish enterprises of headquarter type ("Headquarter Enterprises") in Shanghai, raising the level of headquarter economy and enhancing the opening-up for foreign investments. According to media reports, until the end of May 2022, Shanghai has already attracted in total 848 regional headquarters of multinational companies.

Please find below a comparison of the 2022 RHQ Provisions to the 2019 RHQ Provisions.

1. History and Definitions

Since the first issuance of the relevant provisions on regional headquarters of multinational companies in Shanghai more than two decades ago, the statutory requirements on the establishment have been gradually relaxed in favor of foreign investors. At the beginning, regional headquarters were strictly required to be either foreign-invested holding companies ("HoldCos") as defined under the Provisions on Foreign-invested Holding Companies (last amended by the PRC Ministry of Commerce in 2015, "HoldCo Provisions") or management companies ("ManCos") meeting similar conditions as HoldCos except, for instance, a much lower minimum registered capital. Later on, certain financial and investment requirements on foreign shareholders had been reduced for ManCos to apply for regional headquarters. Since the RHQ provisions in 2017, the concept of “headquarter institutions” has been introduced as a kind of “quasi” regional headquarters with even lower establishment requirements than for regional headquarters.

Same as under the 2019 RHQ Provisions, the 2022 RHQ Provisions still differentiate between regional headquarters ("RHQs") and headquarter institutions ("HIs"). In addition, the new provisions have now added a new type of Headquarter Enterprises – business unit headquarters ("BUHQs"). All these 3 types of Headquarter Enterprises are encouraged forms of headquarters of multinational enterprises in a broad sense, but with different establishment requirements.

"RHQ" means the sole headquarter of a multinational company which shall be an enterprise having independent legal person status and established by a foreign parent company in Shanghai by way of investment or authorization to carry out investment, managing and service functions within a region of more than one country.

This definition is similar to the one in the 2019 RHQ Provisions. It has deleted the examples of "like a HoldCo, a ManCo, etc." for "independent legal person status" in the definition under the 2019 RHQ Provisions. Thus, the 2022 RHQ Provision erased a potential misunderstanding in the 2019 RHQ Provisions and made it clear that RHQs established in Shanghai do not need to meet the (higher) requirements for HoldCos (e.g. minimum paid-in registered capital USD 30,000,000) or ManCos (e.g. total assets of the parent company not lower than USD 400,000,000). Since the last Shanghai RHQ provisions defining ManCos were long abolished in 2017, the term "ManCos" no longer applies anyway in Shanghai for any new establishment.

"HI" means a foreign-invested enterprise which, despite not meeting the standards for RHQs, is established by a foreign shareholder or a HoldCo in Shanghai and carries out several functions such as investment, management, marketing, supporting services, etc. within a region of more than one country. The branch of such a foreign-invested enterprise can also apply for the HI status.

This definition is also similar to the one in the 2019 RHQ Provisions. However, the 2022 RHQ Provisions have newly added and made clear that an HI can be established by a HoldCo and may carry out investment business. With this modified definition, the businesses that HIs can do have been clarified (i.e. including investment) and become more similar to those of RHQs.

"BUHQ" means the sole headquarter of a multinational company which shall be an independent legal person and established by a foreign shareholder with a business unit organization pided by functions, businesses, products, brands, services or established by a HoldCo in Shanghai by way of investment or authorization to carry out investment, managing and service functions of the relevant business unit within a region of more than one country.

BUHQs are a new type of Headquarter Enterprises introduced by the 2022 RHQ Provisions. According to their definition and establishment conditions (for details, please see below), BUHQs are basically RHQs while, however, the operation of the shareholder of BUHQs is based on the organizational structure of business units. Nowadays, more and more multinational enterprises have adopted an internal organization structure based on business units according to various factors such as products, services, brands, regions, customers, etc. Each business unit, though under the macro leadership of the same enterprise, has independent management and accounting functions. Against this background, the concept of BUHQs has been invented to better accommodate the investment needs of multinational enterprises by using one of their business units.

2. Establishment conditions for RHQ, HIs and BUHQs

In general, the establishment conditions for RHQs and HIs have not been changed in the 2022 RHQ Provisions compared to its former version. However, one new point worth attention is that the foreign shareholder of an RHQ, HI or BUHQ shall hold, directly or indirectly, no less than 50% of the equity interests of the respective headquarter. Such limitation did not exist in the 2019 RHQ Provisions. The 2019 RHQ Provisions had abolished the requirement that RHQs and HIs shall be established in the form of a wholly foreign-owned enterprise ("WFOE"), but they did not specify any minimum shareholding ratio of the foreign shareholders. The 2022 RHQ Provisions have now cleared such ambiguity. This indicates the intention of the Shanghai government not to merely attract more foreign investors, but Headquarter Enterprises shall receive more foreign funds. This reflects the legislative purpose of the 2022 RHQ Provisions to increase the volume of foreign investments and to raise the level of headquarter economy.

Further, a new condition has been added for RHQs, HIs and BUHQs, i.e. that the company applying for a headquarter status shall have no behavior of serious dishonesty within the previous three years, or shall have rectified any behavior of dishonesty until the date of the application. Under PRC law, if a company commits a violation of laws or administrative regulations with serious circumstances and is subjected to severe administrative penalties imposed by a relevant authority, or it fails to perform any obligations imposed by effective legal instruments under certain serious circumstance, it shall be included in the relevant lists of serious violations of law and dishonesty published by the competent governmental departments and the PRC Supreme People's Court such as the National Enterprise Credit Information Publicity System (国家企业信用信息公示系统 (gsxt.gov.cn)), Credit China (信用中国 (creditchina.gov.cn)), China Enforcement Information Publicity Network (中国执行信息公开网 (court.gov.cn)). The 2022 RHQ Provisions now require the competent authorities to additionally review the social credit status of a company before they decide whether or not to approve the application of such company for a headquarter status. Therefore, companies intending to become a Headquarter Enterprise of whatsoever type are recommended to stay compliant and keep a "clean" social credit record.

Please see the establishment conditions of the inpidual Headquarter Enterprises as follows:

- For RHQs:

  • New: Minimum direct or indirect shareholding ratio of 50% by the foreign shareholder.
  • Unchanged: RHQs can be established not only as a WFOE but also as a Sino-foreign joint venture (JV).
  • Unchanged: Minimum total assets of the parent company at USD 200,000,000.
  • Unchanged: Minimum registered capital of USD 2,000,000.
  • Unchanged: A foreign shareholder does not need to have totally contributed at least USD 10 million to the registered capital in any subsidiaries within the PRC and to have authorized the management of at least three enterprises inside or outside the PRC. Neither does a foreign shareholder need to have alternatively authorized the management of at least six enterprises inside or outside the PRC.

It should still be noted that the relatively lower registered capital requirement for RHQs has nothing to do with the statutory requirements to establish a HoldCo. These are still very high according to the HoldCo Provisions and remain unchanged. For instance, a HoldCo shall de facto have a minimum registered capital of USD 30,000,000 which shall be used for designated types of investment. While a HoldCo might more easily fulfill all requirements for becoming an RHQ, other foreign-invested companies in Shanghai which are not a HoldCo will still be eligible to apply for the RHQ status as long as they meet the above minimum requirements for RHQs

- For HIs:

  • New: Minimum direct or indirect shareholding ratio of 50% by the foreign shareholder.
  • New: If the HI is a branch, its head company shall have allocated operation funds to the branch of no less than USD 1,000,000 accumulatively in the past three years. While the minimum amount of USD 1,000,000 as such is the same as under the 2019 RHQ Provisions, the condition "accumulatively in the past three years" is new. Since the 2019 RHQ Provisions did not stipulate any payment term for the funds, the newly added part can be viewed as a restriction to shorten the time period for the required funding.
  • Unchanged: HIs can be established not only as a WFOE but also as a JV.
  • Unchanged: Minimum total assets of the parent company at USD 100,000,000.
  • Unchanged: Minimum registered capital of USD 1,000,000.
  • Unchanged: The parent company will no longer need to have established at least two foreign-invested enterprise in China with at least one registered in Shanghai.

- For BUHQs:

The establishment conditions for new BUHQs are mostly the same as for RHQs, i.e.:

  • Minimum direct or indirect shareholding ratio of 50% by the foreign shareholder.
  • BUHQs can be established as a WFOE or as a JV.
  • Minimum total assets of the parent company at USD 200,000,000.
  • Minimum registered capital of USD 2,000,000.

In addition for BUHQs,

  • Operating in Shanghai for over one year.
  • The company applying for BUHQ status shall have a turnover in the previous year which was (1) no less than 10% of the turnover of the relevant business unit of the foreign shareholder and (2) concurrently no less than RMB 1,000,000,000.

3. Amended approval procedures

Under the 2019 RHQ Provisions, the approval for Headquarter Enterprises fell under the sole competence of the Shanghai Commission of Commerce which should decide whether or not to approve the application within eight working days upon application receipt. The new procedures under the 2022 RHQ Provisions comprise of two steps. The company "may" first submit the application to the district department of the Shanghai Commission of Commerce which shall conduct a preliminary review and then submit its preliminary opinion to the Shanghai Commission of Commerce within 5 working days upon receipt of all application documents. The Shanghai Commission of Commerce shall then complete the final examination and decide whether or not to approve the application within five working days upon receipt of all application documents.

We understand that due to a larger number of applications the new procedures aim at mitigating the workload of the Shanghai Commission of Commerce, and the entire approval process will take a bit longer. Since the law text uses "may" for the first application submission, it is currently not clear whether the applicant can skip the preliminary procedure with the district level authority and submit the application directly to the Shanghai Commission of Commerce.

4. Dynamic evaluation and disqualification

The 2022 RHQ Provisions stipulate a new dynamic evaluation process which shall be conducted by the competent approval authorities on approved Headquarter Enterprises by checking the reporting and registration status of such enterprises. A Headquarter Enterprise shall lose its headquarter status if it no longer satisfies the statutory establishment conditions. This provision shows that the Shanghai government, while welcoming new headquarters to be set up in Shanghai on the one hand, will tighten the supervision of approved headquarters on the other hand. Lacking more details, we cannot exclude the possibility that the approval authorities will carry out regular or random checkups on approved headquarters. Therefore, existing headquarters are recommended to establish an internal system for regular self-inspection to ensure that they are always compliant with the latest local legislation and fulfill all statutory establishment conditions for headquarters at any and all times.

5. No news on applicable subsidies and rewards

According to the 2022 RHQ Provisions, Headquarter Enterprises that fulfill relevant conditions may apply for subsidies and rewards according to concrete implementing measures to be made by the relevant departments. To our knowledge, such measures in Shanghai, so far, are only the Measures on Utilization and Administration of the Special Funds for Encouraging Multinationals to Develop Regional Headquarters issued by the Shanghai Commission of Commerce and the Shanghai Finance Bureau on June 27, 2018. These measures only contain subsidies and rewards available for RHQs which mostly require a higher paid-in registered capital of at least USD 2,000,000. We are so far not aware of any subsidies or rewards available for HIs or BUHQs. We expect that relevant measures might be in the pipeline following the effectiveness of the new RHQ provisions. In case of any potential headquarter-based investment plans, we suggest that foreign investors should consult the Shanghai Commission of Commerce and the Shanghai Finance Bureau on any available financial incentives applicable for their projects and also negotiate for such incentives on a case by case basis.

6. No substantial or concrete benefit policies for Headquarter Enterprises

According to the 2022 RHQ Provisions, Headquarter Enterprises shall be provided with further support and benefits in the areas of cross-border cash pooling business, foreign exchange settlement and transactions, goods and services trade, logistics, public science and technology projects, etc. However, similar as under the 2019 RHQ Provisions, we have seen no unique or concrete support or convenience measures that will be exclusively granted to Headquarter Enterprises. Normal foreign-invested companies or Chinese domestic companies may apply for and enjoy the same benefits if they fulfill the relevant conditions.

We suggest that in case of an intended headquarter-related investment project, the foreign investor should discuss with the Shanghai Commission of Commerce and other competent departments to clarify what concrete benefit policies are currently available.

7. Full online registration formality

According to the 2022 RHQ Provisions, registration formality of Headquarter Enterprises with the Shanghai Market Supervision Administration ("MSA") will be fully conducted online. So far, registration formalities with the MSA for foreign-invested companies are only partly online and submission of paper application documents is still required. With this new policy, more time and efforts will be saved in case a Headquarter Enterprise wants to change any corporate items that are subject to statutory registration or record with the MSA.

8. Further facilitation of immigration and talent policies

The 2022 RHQ Provisions have extended the maximum validity term of business visa from the previous one year to five years for foreign personnel of Headquarter Enterprises who need multiple temporary entry to China. Unchanged remain the maximum 180 days period of each stay and the 3 to 5 years residence permit for foreign personnel who need to stay in Shanghai for a long term. Another improvement is that foreign senior managers of Headquarter Enterprises may have the priority in being recommended for applying for a permanent residence permit i.e. Green Card.

The 2022 RHQ Provisions further stipulate that, subject to the relevant policies, the respective competent entry and exit administration bureau, health commission and human resources and social security bureau shall provide convenience for relatives of foreign senior managers of Headquarter Enterprises in terms of application for visa and residence permits, medical services, talent apartments, etc.

Summary

The 2022 RHQ Provisions reflect the decision of the Shanghai government to further attract foreign investments of larger volume. The significant progress lies in the introduction of the new type of BUHQs which shows that Shanghai is observing the evolution of multinational enterprises to adapt its investment-friendly policies. Nevertheless, the 2022 RHQ Provisions did not further relax any establishment conditions or facilitate any concrete auxiliary measures for the operation of Headquarter Enterprises. Therefore, in order to give foreign investors more transparency and motivation to set up headquarters in Shanghai, we expect that more and detailed implementing provisions may be made by the Shanghai government to give more substance to the local headquarters policies.