New regulations to encourage companies to establish regional headquarters in Shanghai

This summer the Shanghai Municipal Government published the Opinions on implementation of the provisions on encouraging multinational companies to establish regional headquarters in Shanghai ("New Opinions"). The New Opinions took affect on the same day and have a validity period until 30 June 2017. They have been formulated jointly by the Shanghai Commission of Commerce and seven other municipal authorities. Already for several years, the Shanghai Government has been encouraging multinational companies to establish their regional headquarters ("RHQs") in Shanghai. Back on 3 December 2008, for this purpose already the Opinions on implementation of the provisions on encouraging multinational companies to establish regional headquarters in Shanghai had been enacted ("Old Opinions") which offered various incentives and subsidies to RHQs.

1. Under the Old Opinions, the following financial incentives were granted to RHQs in Shanghai:

• Subsidy for New Establishment. A new RHQ in form of a holding company was entitled to a subsidy of RMB 5 million. The subsidy would be paid in three installments (respectively 40%, 30% and 30% in the first three years starting from the year of registration or relocation).
• Rental Subsidy. A new RHQ regardless whether in form of a holding company or a management company was entitled to a yearly rental subsidy over a period of three years. The yearly subsidy equaled to 30% of the rental up to a maximum leasing area of 1,000 square meters and the maximum rental rate of RMB 8 per square meter. In case of purchase or construction of an office for self-use, the new RHQ was granted a lump-sum award at the same rate as the rental subsidy.
• Please note that the above New Establishment Subsidy and Rental Subsidy was applicable only to a new RHQ, i.e. a RHQ established in or relocated to Shanghai after 7 July 2008.
• Performance Reward. For a holding company recognized as a National-level RHQ, starting from the year of recognition, when it achieved an annual operating revenue of above RMB 1 billion for the first time, it would be granted an award of RMB 10 million, which would be paid over a period of three years. A similar performance reward was granted to a management company recognized as local-level RHQ. However, in the latter case, the revenue requirement was RMB 0.5 billion and the award was RMB 5 million. Under the Old Opinions, it was not mentioned whether the Performance Reward only applied to "new" RHQs.

2. The New Opinions generally keep the above incentives. However, the conditions for the relevant financial incentives have been either amended or clarified as follows:

• Subsidy for New Establishment. The New Opinions further stress that such subsidy is only applicable to "new" RHQs, i.e. those established in or relocated to Shanghai after 7 July 2008. Further, the New Opinions add one condition: the new RHQ in the form of a holding company must have at least ten employees. Time wise, the subsidy shall now be paid in three installments (respectively 40%, 30% and 30% in three years starting from the year following the registration or relocation).
• Rental Subsidy. The incentives remain the same as under the Old Opinions. The New Opinions stress that the Rental Subsidy apply only to "new" RHQs. They also add the new condition of "at least ten employees".
• Performance Reward. The New Opinions clarify that the Performance Reward does not require the RHQs to be "new". For a holding company recognized as a national-level RHQ or a management company recognized as local-level RHQ, if it got the recognition before 7 July 2008, it will be entitled to the applicable Performance Reward, when it reaches the annual revenue requirement for the first time starting from the year 2008. If a RHQ (belonging to the above two types) got its RHQ recognition after 7 July 2008, it shall be entitled to the Performance Reward when it reaches the annual revenue requirement for the first time starting from the year of its recognition.

Under the Old Opinions, there was no Performance Reward for a holding company recognized as a local-level RHQ. The New Opinions now provide a similar Performance Reward to such RHQ. Such RHQ (if recognized before 1 January 2012) is entitled to a Performance Reward of RMB 5 million when its annual operational revenue is above RMB 1 billion for the first time after the year 2012. If such RHQ was/is recognised after 1 January 2012, it shall be entitled to the same Performance Reward when it reaches the annual revenue requirement for the first time starting from the year of its recognition.

3. The New Opinions also grant the following new incentives:

• Subsidy for Establishment of RHQs covering Asia, Asia-Pacific or broader regions. If (1) a newly-established RHQ covers Asia, Asia-Pacific or broader regions, (2) has 50 or more employees, and (3) its legal representative appointed by the parent company and most of its senior management reside and work in Shanghai, the RHQ shall be entitled to a subsidy of RMB 8 million. The payment is made over a period of three years.
• Subsidy for Upgrading the Level of current RHQs. If an existing RHQ is upgraded to also cover Asia, Asia-Pacific or broader regions and meets the other two conditions mentioned in the above paragraph, it shall be entitled to a lump-sum award of RMB 3 million which will be paid over a period of three years.
• Subsidy for Equity Restructuring. For certain RHQs in the form of a holding company which the Shanghai Government particularly wishes to attract, upon examination and approval of the Shanghai Commission of Commerce, the Shanghai Finance Bureau and other authorities, the cost and expenses arising out of its internal equity restructuring will be appropriately subsidized.
• Fund Management. Both the Old Opinions and the New Opinions encourage RHQs to centrally manage the group's funds. The New Opinions also encourage RHQs to centralize the group's RMB payments and receipts for cross-border transactions under current account items. However, it remains to be seen what kind of facilitations will be introduced for the RHQs in respect of fund management function. The New Opinions also provide that a pilot program will be launched to simplify administrative procedures for RHQs for their cross-border current account transactions settled in RMB.
• Personnel Mobility. The New Opinions further simplify the application for Shanghai Residence Permit (B Type), and relieve conditions regarding health certification. According to the New Opinions, personnel with origin in China who have received advanced education abroad and talent from outside Mainland China and abroad as well as their family members shall have priority to apply for Shanghai Residence Permit (Type B), if they are employed by an RHQ in Shanghai. The Shanghai Residence Permit (Type B) can be used by the holders for the purpose of opening bank accounts, participating in social insurance in Shanghai or arranging their children to get education in Shanghai, etc. The entry-exit inspection and quarantine departments shall provide green channels for handling the health certification for the legal representatives and senior management of RHQs.
• Convenience in Customs Clearance. According to the New Opinions, a RHQ with a customs rating of grade A or above may handle customs declaration with the competent customs at the place where it is located for goods imported (except for certain good under special supervision) by its subsidiaries in Shanghai and may also file inspection applications for these with the entry-exit inspection and quarantine department on a centralized basis. It is not mentioned whether this would also apply to a RHQ in the form of a management company, since such company normally does not have subsidiaries.

The New Opinions confirm the determination of the Shanghai Government to further develop the service industry sector and to make Shanghai a hub for regional headquarters.