New chapter for foreign telecom investment in Shanghai free-trade zone

By Daniel Chan, Peter Chen, Peng Tao and Zipo Lai

The telecom industry has traditionally been highly regulated and restricted in terms of foreign investment in China.

China tightly controls what types of telecom business including basic telecom services (BTS) and value-added telecom services (VATS) are open for foreign investment. China has not yet allowed foreign investment in BTS, but has had three types of VATS open for foreign investment including: information services, store and forward services, and on-line data processing and transaction processing services pursuant to its WTO commitments.

However, the national telecom regulations have imposed a 50 per cent foreign equity ownership cap on VATS. This means foreign investors cannot set up a wholly owned subsidiary (WFOE), but must find a Chinese partner to set up a 50/50 joint venture (JV) for engaging in VATS businesses. Despite the route of JV offered under the national regulations, in practice it has been extremely difficult to obtain the VATS licence from the Ministry of Industry and Information Technology (MIIT) for actually establishing a JV. This has led many foreign investors to adopt the so-called VIE structure for operating a VATS business in China…

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