In November 2008, the Shanghai municipal government issued the Implementation Guidelines of Encouraging Establishment of Regional Headquarters by Foreign Multinational Corporations Provisions (the “Guidelines”), which set out incentives for establishing a regional headquarters in Shanghai. Specifically, the Guidelines provide incentives for investment or management foreign invested enterprises (“FIEs”) to establish their regional headquarters in Shanghai or to move to Shanghai from another city in the region.
The Guidelines are part of a larger effort of the People’s Government of Shanghai Municipality to attract foreign investment that has often ended up in Hong Kong or Singapore. By providing these incentives for regional headquarters, such as cash subsidies, monetary awards based on annual revenue, long term entry visas and expedited customs clearance, the Guidelines seek to create a more attractive environment for foreign investment in Shanghai.
Definition
Under the terms and conditions of the Guidelines, Shanghai allows investment or management FIEs to apply for regional headquarter status. Under the Guidelines, an investment or management FIE should:
(i) Be registered in Shanghai;
(ii) Owned by a multinational corporation;
(iii) Be the single organization in the region authorized by the parent multinational corporation to exercise overall management and service authorities over the FIE’s subsidiaries within the region, which must be based in at least two countries; and
(iv) Have authority over the regional subsidiaries through its investment in such subsidiaries or through delegation of power by the parent multinational corporation.
Conditions
In order for an investment or management FIE to be granted regional headquarters status, the following conditions must be met:
(i) The parent multinational corporation:
i. Must have total worldwide assets amounting to a minimum of US$400 million;
ii. Must have at least US$10 million of total registered capital invested in China, which can include the registered capital of the investment or management FIE seeking regional headquarter status, and must be authorized to manage a minimum of three enterprises; or
iii. Must be authorized by its own corporate charter to manage a minimum of six enterprises worldwide.
(ii) The investment FIE and management FIE must, respectively have at least US$30 million registered capital and US$2 million registered capital.
Incentives
Just as municipal governments in other cities like Beijing, Guangzhou or Shenzhen, offer certain incentives to foreign investment in their regions, Shanghai offers many benefits to qualifying regional headquarters in Shanghai.
Start-Up New regional headquarters, including those that move to Shanghai from other cities in the region, will be given startup cash subsidies of US$730,000 over a period of three years.
In addition, regional headquarters which rent offices in Shanghai will be granted rental subsidies of US$124,100 per year for three years.
Monetary Award Investment FIEs that are granted regional headquarter status and that have annual revenue exceeding US$143,000,000 will be given a cash payment of US$1,430,000 over a three year period. Similarly, management FIEs with annual revenue exceeding US$71,430,000 will be given US$ 714,300 over three years.
Entry Visa Legal representatives of the regional headquarters in Shanghai will receive three to five year visas. Foreign employees of the regional headquarters will receive one to five year visas.
Customs Procedures An FIE granted regional headquarters status in Shanghai will also have access to faster customs clearance. However, details are not yet forthcoming regarding the precise nature of this benefit.
Conclusion
In effect, the Guidelines tell us what we already know: FDI in China has dropped in response to the nature of the economic changes facing investors. As a result, foreign investment promotion bureaus across China are eager to entice foreign investors into their jurisdictions.
Critically, make sure incentives are duly authorized by law, regulations or other publicly available rules. In the absence of such a proper basis, an FIE can ultimately be held liable for illegitimate incentives offered by a local government, regardless of what the local government promises at the time of offering the incentive.
In addition, make sure incentives are clearly set out before any investment is made. By way of example, what is the precise nature of expedited customs clearance being offered and how will such incentive impact your bottom line? What is the length of the visas you will be granted? This is always relevant, and even more so when an incentive is promised by one government entity (in the case of the customs clearance, the Shanghai Municipal government) but will actually be delivered by another government agency (here, the National-level Chinese Customs).
There are opportunities to be found in times of change. However, planning, experience and patience are needed to help you find opportunities during this period of dramatic change.
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