By Coco Fan 范可
Which city is the most attractive FDI destination for multinational corporations (“MNCs”) across the country? Up to the end of 2016, foreign investors have voted for Shanghai by establishing 580 regional headquarters, 330 foreign-invested holding companies and 411 foreign-invested R&D centers. In 2016, regional headquarters of MNCs (“RHQs”), which only account for 1.26% in the total amount of foreign-invested enterprises in Shanghai, contributed 17.37% of total net profits and paid 10.59% of total taxes of foreign-invested enterprises in Shanghai. As the city with highest concentration of RHQs in Mainland China, Shanghai obviously has found the sweet spot in promoting economic growth since it firstly issued policies to encourage MNCs to establish RHQs in 2002. On January 27, 2017, Shanghai Municipal People’s Government issued the revised Regulations to Encourage the Establishment of Regional Headquarters by Multinational Corporations in Shanghai (Hu Fu Fa [2017] No. 9) (“Circular 9”), which further improves its incentive policies to RHQs.
I. Major Changes Brought by Circular 9
Compared with the previous version promulgated six years ago, Circular 9 mainly upgrades the incentive policies provided to RHQs in Shanghai in the following aspects:
1. Introducing “Quasi-headquarters” into the Scope of RHQs
According to Circular 9, “RHQs” means the sole headquarters established by way of investment or authorization by a parent company registered overseas, fulfilling functions of managing enterprises and providing services to enterprises in a region consisting of more than one country. A MNC shall establish its regional headquarters in Shanghai Municipality as an independent legal person in the form of a wholly foreign owned holding company or management company.
For purpose of attracting more entities of MNCs undertaking function of regional headquarters to settle down in Shanghai, “Quasi-headquarters of MNCs” is included into the scope of RHQs in Circular 9.
“Quasi-headquarters of MNCs” (“Quasi-headquarters”) means a wholly foreign-invested enterprise (including a branch office), though fails to meet the requirements of recognition of RHQs, which performs certain management functions among decision making, capital management, procurement, sales, logistics, settlement, R&D, training and other supporting functions in the region of more than one country for its overseas parent company.
Therefore, MNCs’ branch offices which are not an independent legal person may also have the opportunity to apply for RHQs in Shanghai.
2. The Lower Threshold for Setting up RHQs in Shanghai
In light of asset-light trend of MNCs in service industry, the recognition requirements for RHQs have been classified into different categories under Circular 9.
(i) Recognition Requirements for Regional Headquarters:
Wholly foreign-invested enterprises with independent legal person status.
Registered capital shall be not less than USD 2 million.
Total assets of the parent company shall be not less than USD 0.4 billion; for MNCs in service industry, total assets of the parent company shall be not less than USD 0.3 billion.
Total accumulative amount of registered capital paid by the parent company for investment in China shall be not less than USD 10 million; and the number of enterprises that such RHQs is authorized to manage in and out of China by the parent company shall be not less than three; or The number of enterprises that such enterprise is authorized to manage in and out of China by the parent company shall be not less than six.
Enterprises that basically satisfy the aforesaid requirements and have made prominent contributions to local economic development may be taken into consideration by the authorities and recognized accordingly.
(ii) Recognition requirements for Quasi-headquarters:
Wholly foreign-invested enterprises with independent legal person status or its branch offices.
Total assets of the parent company shall be not less than USD 0.2 billion and the number of foreign-invested enterprises that the parent company has invested in China shall be not less than two, with one of them shall be registered in Shanghai.
Registered capital shall be not less than USD 2 million, if established in the form of branch office, the operation funds allocated by the parent company shall not be less than USD 2 million.
Therefore, the threshold for Quasi-headquarters is less strict than RHQs. For MNCs in service industry to apply for RHQs, the total assets of the parent company have been adjusted to be not less than USD 0.3 billion from the original USD 0.4 billion while recognition requirements for other MNCs remain the same. The threshold for MNCs setting up RHQs in service industry in Shanghai has been significantly lowered.
3. Cancelling the Requirement on Incorporation Form of RHQs
Comparing to its previous version, Circular 9 no longer requires RHQs to be incorporated in the form of a holding company or management company.
4. Removing Restrictions on RHQs’ Business Scope
The business scope of RHQs was restricted to investment and management before Circular 9. Now such restriction has been removed which means RHQs may have more flexibility in its business strategy.
5. Preferential Policies on Capital Management
Circular 9 grants more preferential policies on capital management of RHQs and Quasi-headquarters in the following aspects:
RHQs and Quasi-headquarters could set up a unified internal funds management system and carry out centralized management of foreign exchange funds.
Holding companies may establish a financial company to centralize the management of its capital within its group companies.
Bi-directional cross-border RMB cash pool and centralized collection and payment of cross-border RMB under current account could be utilized by RHQs and Quasi-headquarters for cross-border RMB business.
Green channel for foreign exchange payment under non-trade account.
RHQs and Quasi-headquarters registered within Shanghai Free Trade Zone could open free trade account and handle cross-border RMB and foreign exchange balance and domestic RMB balance.
6. Further Simplifying Exit & Entry Formalities for RHQs’ Employees
Circular 9 provides more convenience to both Chinese and foreign employees of RHQs in exit & entry formalities, such as:
Green channels for the handling of health certificates of legal representatives and senior management relating to functions of RHQs and Quasi-headquarters.
A multiple entry visitor's visa for foreign staff of RHQs and Quasi-headquarters.
When time is of the essence, foreign staff of RHQs and Quasi-headquarters who need to come to Shanghai Municipality temporarily may apply for a port entry visa instead of a regular entry visa.
Foreign staff of RHQs and Quasi-headquarters who need to reside in Shanghai Municipality on a long-term basis may apply for a foreigner's residence permit valid for between three and five years. Legal representatives and other senior management of RHQs and Quasi-headquarters may be given priority in regard to applying for a Foreigner's Permanent Residence Certificate.
7. Talent Policy
Circular 9 also provides conveniences for working and the application of relevant certificates of talents introduced by RHQs and Quasi-headquarters including getting the household register of Shanghai Municipality. Shanghai household register is a valuable resource due to Shanghai’s special positions in China and is very critical for house and car license purchase as well as education and healthcare in Shanghai.
Districts where RHQs and Quasi-headquarters are registered will also provide conveniences for the talents introduced in respect of children entering schools, healthcare, the application for apartments prepared for talent, etc.
8. Facilitation of Customs Clearance
According to Circular 9, customs and entry and exit inspection and quarantine authorities in Shanghai will innovate supervision systems and modes, and focus on the enhancement of customs clearance efficiency for RHQs and Quasi-headquarters, so as to provide customs clearance convenience for the imported and exported goods thereof.
Customs, foreign exchange, entry and exit inspection and quarantine and other relevant authorities will adopt regulatory measures that facilitate the establishment of bonded logistics centers and distribution centers by RHQs and Quasi-headquarters to integrate their logistical activities.
9. Governments at Shanghai District Level are encouraged to Provide Supportive Policies to RHQs and Quasi-headquarters
Circular 9 allows governments at district level to formulating their own supportive policies to RHQs and Quasi-headquarters to create a business environment favorable for the development of headquarter economic. It is worth expecting the detail implementation rules to be released by different district-level governments, especially the fiscal and taxation incentives.
II. Subsidies and Awards
The Current Policy System for RHQs of MNCs in Shanghai consist of Circular 9 and Measures for the Use and Management of the Special Fund of Shanghai Municipality for Encouraging the Development of Regional Headquarters of Multinational Companies (Hu Shang Wai Zi [2013] No.283) promulgated by Shanghai Municipal Finance Bureau and Shanghai Municipal Commission of Commerce, effective as of April 12, 2013 (“Measures”).
According to the Measures, Shanghai Government sets up a special fund for encouraging the development of RHQs. We summarize the current standard of the fund as follows:
Shanghai Municipal Commission of Commerce is updating the Measure to cooperate with the upgraded policy for RHQs and Quasi-headquarter. According to a reliable source, the revised Measure will be released before 2018, the support on awards and subsidies will be further strengthen than the above-listed current standards, and the incentive policies to be further released may provide different supports to RHQs and Quasi-headquarters.
In general, it could be foreseen that by issuance of Circular 9, Shanghai aims to demonstrating its leading role in China’s opening-up reform for foreign investors and to further solidify its position as the most favorite location for attracting MNCs to establishing RHQs in China. Qualified foreign investment enterprises including their branches may consider to lodge their application to the competent authority, i.e. Shanghai Municipal Commission of Commerce at district-level.
Other cities competing with Shanghai in attracting foreign investment such as Beijing, Guangzhou, Shenzhen, Tianjin and Chongqing, etc. may also launch their incentive policies in the near future. Foreign-invested enterprises could also pay close attention to the developments of relevant policies for RHQs in other areas.
