Shanghai Continues Encouraging Regional Headquarters of Multinational Companies

On July 25, 2019, the People’s Government of Shanghai Municipality issued Several Opinions on Promotion of the Development of Multinational Companies’ Regional Headquarters in Shanghai (Hu Fu Gui [2019] No. 30) (“Opinions”) and a Notice on Issuing the Revised Provisions on Encouraging Multinational Companies to Establish Regional Headquarters in Shanghai Municipality (Hu Fu Gui [2019] No. 31) (“Notice”, with the issued provisions referred to as “2019 RHQ Provisions”). Both the Opinions and 2019 RHQ Provisions will take effect on September 1, 2019 and have a validity term until August 31, 2024. The Notice has simultaneously abolished the 2017 version of the RHQ Provisions (“2017 RHQ Provisions”). 

The new provisions mainly aim at further opening-up for foreign investment and speeding up the development of regional headquarters in Shanghai. According to media reports, until the end of July 2019, Shanghai has already attracted 696 regional headquarters of multinational companies.

To give you an overview of these new provisions, we summarize the Opinions and the 2019 RHQ Provisions compared to the 2017 RHQ Provisions as follows.

1. History and Definitions

Since the first issuance of the relevant provisions on regional headquarters of multinational companies in Shanghai more than a decade ago, the statutory requirements on the establishment of regional headquarters in Shanghai 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 the foreign shareholders had been reduced for ManCos to apply for regional headquarters. Since the 2017 RHQ Provisions the concept of “headquarters institutions” has been introduced as a kind of “quasi” regional headquarters with even lower entry requirements than for regional headquarters.      

Same as under the 2017 RHQ Provisions, the 2019 RHQ Provisions still differentiate between regional headquarters (“RHQs”) and headquarters institutions (“HIs”). Both are encouraged forms of regional headquarters of multinational companies in a broad sense, but with different establishment requirements. 

“RHQ” means, as defined in Article 2, para. 1 of the 2019 RHQ Provisions, the sole headquarters – which shall be an enterprise having independent legal person status like a HoldCo, a ManCo, etc. – established by a foreign parent company in Shanghai by way of investment or authorization to carry on managing and service functions for enterprises within a region of more than one country.

“HI” means, as defined in Article 2, para. 2 of the 2019 RHQ Provisions, a foreign-invested enterprise (including any branches thereof) which, despite not meeting the standards for RHQs, carries on several functions of supporting services of the foreign parent company, such as management decision-making, capital management, procurement, sales, logistics, settlement, research and development, training, etc. (“Headquarters’ Functions”) within a region of more than one country. HIs may, therefore, be understood as quasi-RHQs.

2. Entry conditions for RHQ and multinational companies’ headquarters institutions (“HIs”) are eased.

These eased conditions mainly concern the requirements on the minimum financial and investment capacity of the foreign parent companies and on the legal form of the RHQs / HIs.  

For RHQs:

• RHQs will no longer need to be a WHOLLY foreign-invested enterprise. This means, at least in theory, Sino-foreign equity joint ventures and contractual joint ventures having legal person status shall be eligible for applying for the RHQ status.
• The minimum requirement on the total assets of the parent company of an RHQ has been reduced from USD 400 million to USD 200 million. This also applies to parent companies of RHQs in the service sector for which the minimum total asset amount of USD 300 million applied previously.
• The parent companies will no longer need to have totally contributed at least USD 10 million to the registered capital within the PRC and to have authorized the management of at least three enterprises inside or outside the PRC. Neither will the parent companies need to have alternatively authorized the management of at least six enterprises inside or outside the PRC. This means, at least in theory, a foreign parent company might be able to establish an RHQ in Shanghai in the future even if it has not yet made any contribution to the registered capital within the PRC.
• (Unchanged) minimum registered capital USD 2 million.

When understanding such reduced requirements for RHQs, it may be important to bear in mind that the statutory requirements to establish a HoldCo are not touched upon. 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 that are not a HoldCo will still be eligible to apply for the RHQ status as long as they are a ManCo which meets the above minimum requirements for RHQs. 

For HIs:

• HIs will no longer need to be a WHOLLY foreign-invested enterprise or the branch of a WHOLLY foreign-invested enterprise. This means, at least in theory, Sino-foreign equity joint ventures and contractual joint ventures having legal person status, or their branches shall be eligible for applying for the HI status.
• The minimum requirement on the total assets of the parent company of an HI has been reduced from USD 200 million to USD 100 million.
• The parent companies will no longer need to have established at least two foreign-invested enterprise in China with at least one registered in Shanghai.
• The minimum registered capital of HIs has been reduced from USD 2 million to USD 1 million. The minimum operation funds of HIs being branches have been reduced from USD 2 million to USD 1 million.  

As compensation for the abolished minimum requirements on the investment scale of the parent companies, the applicant for RHQs or HIs shall provide the authorization documents issued by the parent companies for the applicant to carry on Headquarters’ Functions within the region of more than one country. The 2019 RHQ Provisions do not specify the content and scope of such authorization documents. Therefore, it is advisable that the applicant should consult the Shanghai Municipal Commission of Commerce (“SHCoC”) in advance to know the practical requirements for preparation of the authorization documents.

The Opinions further call upon the responsibility of the Shanghai Municipal Tax Bureau and the Shanghai Municipal Finance Bureau (“SHFB”) to facilitate and support restructuring concerning RHQs or HIs. Financial benefits have been so far granted by the SHCoC and the SHFB and disbursed by the district finance bureaus as “Special Subsidies for Encouraged Development of RHQs” to RHQs and foreign-invested R&D centers according to the Measures on Use and Administration of Special Subsidies for Encouraged Development of RHQs in Shanghai (last amended by the SHCoC and the SHFB in 2018). Such subsidies contain supportive funds for set-up and office rentals, incentives depending on the RHQs’ annual turn-over, etc. Therefore, supportive and facilitating measures in tax and finance aspects may be expected for RHQs / HIs. The above authorities will need to respond with auxiliary actions and implementing rules.

3. Use of funds shall be further made easier.

According to the Opinions, RHQs / HIs shall be provided with support and convenience to be able to further utilize their funds in the cases of cross-border cash pooling business, foreign exchange settlement and transactions, capital market investment and financing, etc.

However, most of the items in the Opinions are not new or concrete measures for RHQs / HIs. For instance, the principal rules on cross-border cash pooling have already been regulated under the existing Administrative Provisions on Concentrated Operation of Cross-border Funds of Multinational Companies (released by the PRC State Administration of Foreign Exchange (“SAFE”) on March 15, 2019).

Therefore, the next step should be, as so designated by the Shanghai Government in the Opinions, for the Shanghai Branch of the SAFE and the Shanghai Head Office of the People’s Bank of China to respectively roll out concrete implementing rules or measures specifically applicable to RHQs / HIs.   

4. Trade, logistics and R&D of RHQs / HIs will be further facilitated.

Similarly, the Shanghai Government has required convenience to be granted to RHQs / HIs in the areas of trade, logistics, R&D, protection of intellectual property, etc. while leaving the concrete measures and practical solutions open. It shall be the responsibility of the respective functional departments in Shanghai to realize and specify the intention of the municipal government.

One remarkable item concerns “chain enterprises” (in Chinese: 连锁企业) of RHQs / HIs with trading functions. According to the Opinions, a pilot project shall be launched in Shanghai to apply “One Business License for Several Addresses” (in Chinese: 一照多址) to promote the degree of facilitation for RHQs and HIs with outstanding trading functions to establish “chain shops” (in Chinese: 连锁店). Literally, this could mean that enterprise chains doing trading business (e.g. a head trading company with several branches as shops) might be allowed to share one business license / registered address or carry out business outside a registered address without another mandatory registration. If such rule will be implemented, this would indeed result in more convenience for establishing a branch to carry out business beyond the registered address of its head company, as long as the head company qualifies as an RHQ / HI. The Opinions, however, do not define “chain shops”. Such term might easily be associated with retail chain shops (like convenience stores) in context with trading business. We have inquired with the SHCoC and the Shanghai Market Supervision Administration (“SHMSA”) how they interpret the above term. The SHMSA indicated that it may not limit the application to “retail chain shops” only, but that also other types of trading chain business like e.g. in the service trading sector may be eligible. Whether and how this pilot project shall function in reality, will depend on the implementing rules to be made by the SHMSA. 

In summary, as of September 1, 2019 lower establishment requirements will apply for foreign-invested companies to apply for the acknowledgement as an RHQ or HI. Even Sino-foreign joint ventures will possibly be eligible to become an RHQ or HI. In the near future, additional supportive policies and measures may be expected for RHQs and HIs to maximize their legitimate rights and interests, and to further exercise their Headquarters’ Functions. For the time being, it is, however, unclear how soon such policies and measures will be issued.