Provisions from the Shanghai Municipality on Encouraging the Establishment of Regional Headquarters by Transnational Corporations(Mainland China)

James Cheng
The Shanghai Municipal People’s Government promulgated the amendments to the Provisions of the Shanghai Municipality on Encouraging the Establishment of Regional Headquarters by Transnational Corporations (the “Regional Headquarters Provisions”) on January 27, 2017 to optimize Shanghai’s environment for investment, economic development and policy services, thereby making Shanghai more attractive as a top choice for transnational corporates to set up their regional headquarters in. The Regional Headquarters Provisions are primarily focused on revising the following five aspects:
First, the concept of “headquarters-type entity” is formally introduced. A headquarters-type entity refers to a foreign sole-proprietorship (including affiliates) which carries out multiple support functions such as the management policies, fund management, procurement, sales, logistics, settlement, research and development, and training over one or more countries for its parent company that is registered overseas, even though such foreign sole-proprietorship does not meet the criteria for a regional headquarters of a transnational corporations. The introduction of this concept expands the scope of enterprises eligible for benefits under the regional headquarters policy.
Second, the corporate type and operating scope requirements for the regional headquarters of transnational corporations are canceled. Before the amendments, investment-oriented and management-oriented companies may be deemed as having regional headquarters, and the amendments have now removed such requirements. This means that in addition to the previous investment-oriented and management-oriented companies, foreign-invested enterprises that meet the recognition criteria, including companies engaging in consulting, trading and production, may also apply for regional headquarters status. Furthermore, with the removal of the operating scope requirement, an enterprise now enjoys more autonomy over its scope of business.
Third, the recognition criteria are adjusted. Prior to the amendments, there is a difference in criteria between recognizing the regional headquarters status for investment-oriented companies and those for management-oriented companies. After the amendments, companies that meet the requirements are all eligible to apply for regional headquarters recognition regardless of type. The requirements for regional headquarters recognition include: (1) a foreign sole-proprietorship qualified as an independent legal person; (2) the total assets of the parent company shall not be lower than US$400 million; and in case of a regional headquarters set up by a service sector enterprise, the total assets of the parent company shall not be lower than US$300 million; (3) the cumulative total paid-in registered capital of the parent company’s investment in China shall not be lower than US$10 million with no less than three enterprises managed inside and outside of China under the authorization of the parent company; or there shall be no less than six enterprises managed inside and outside of China under the authorization of the parent company, discretionary basis may be afforded if the aforementioned conditions are met and there has been; outstanding contribution to the development of the local economy; and (4) the registered capital shall not be lower than US$2 million.
Fourth, the scope of fund management business which may be engaged by the local headquarters is specified. The Regional Headquarters Provisions specifically provide that regional headquarters and headquarter-type entities may engage in the kinds of centralized operation and management of foreign exchange funds listed under the Provisions on the Centralized Operation and Management of Foreign Exchange Funds by Transnational Corporations (Hui Fa [2015] No. 36), and regional headquarters and headquarters-type entities are encouraged to engage in all kinds of cross-border RMB business. Regional headquarters and headquarters-type entities within the Shanghai Free Trade Zone may also set up free trade accounts. The above new provisions further streamline the procedures for the management of foreign exchange funds and cross-border collection and payment of local and foreign currencies within a transnational group, as well as further enhance fund utilization efficiency.
Fifth, regional government support provisions are made. The amendments include regional government support provisions for the first time to encourage regional governments to formulate policy measures that fit the regional circumstances to foster a business environment that is favorable to the development of regional headquarters and to further carry out and refine applicable requirements.
Since the amendments abolish the original opinions on the implementation of the provisions on regional headquarters, namely the Opinions on the Implementation of the Provisions of Shanghai Municipality on Encouraging Transnational Corporations to Establish Regional Headquarters (Hu Fu Ban Fa [2012] No. 51), and the refined subsidy and encouragement policy in such implementation opinions, it is believed that new detailed implementation regulations will be released in Shanghai shortly to supplement the gaps in the aforementioned encouragement policy. The Regional Headquarters Provisions came into effect on February 1, 2017 and will continue to be effective until January 31, 2022.