Shanghai has issued new
regulations designed to encourage more multinationals to set up their regional
headquarters operations in the city.
The setting up of a headquarters operation is one of the most important
decisions facing multinational corporations (MNCs) wanting to develop their
activities in China.
The Ministry of Foreign Trade and Economic Co-operation issued the first
provisional regulations concerning Chinese investment holding companies in
1995. Since then, more than 200 MNCs have set up Chinese holding companies
(CHCs) to provide headquarters functions for their investments in China. Beijing and Shanghai
are the most popular locations for such operations.
With China's accession to
the World Trade Organisation, MNCs have been shifting their Asia focus to the
region. Regional sales directors and chief financial officers are required to
spend more time in China
or even relocate there to closely monitor their company's operations. In
addition, many MNCs have regional shared-service centres in their China head
offices. These offices share functions such as capital management, finance,
accounting, human resources and procurement.
Over the last five years, the Chinese government has been keen to improve on
the 1995 regulations by allowing more headquarters functions to be carried out
under the business license of the CHC (see table). However, this legislation
seems to apply only to operations within China,
and does offer any incentive for CHCs to operate non-China regional services (such
as regional sales, procurement and treasury functions) for their affiliates
Without proper regulation on this point, most MNCs have been reluctant to base
their Asia- Pacific regional headquarters in China.
municipal government issued a circular in 1999 to encourage MNCs to locate in
the Chinese capital. However, the circular was not clear on the conditions
attached to doing so. Nor did it offer specific guidelines on approved Beijing regional headquarters performing regional services
municipal government issued its own set of regulations in July 2002. These
bring fresh hope to MNCs, spelling out precisely the conditions attached to
setting up a headquarters operation in Shanghai:
the total assets of the parent company should not be less than US$400m
the amount of accumulated investment in China by the parent company should not
be less than US$30m
at least three enterprises within or outside China must be invested by, or
authorised to be managed by, the regional headquarters.
More important, the regulations allow regional headquarters to take the legal
form of either a CHC with minimum registered capital of US$30m, or a management
company with a minimum registered capital of only US$2m. This appears to offer
an alternative corporate vehicle for MNCs that had previously been hindered by
the huge capital commitment required by the CHC structure.
The Shanghai regulations specifically allow an approved headquarters operation
to provide the following management and support services for MNC group
companies within or outside China:
decision-making on investment operations
capital management and financial administration
technical support and R&D
employee training and administration.
They also approve a number of incentives.
government will offer support to establish global or regional procurement and
logistics centres, with general importexport trading rights and possible VAT
refunds on exports. Financial subsidies will be granted if headquarters
operations offer training programmes for their employees in areas that are
considered particularly important. No specific guidelines have yet been issued
by the authorities but they are likely to refer to some management or other
advanced techniques that are rarely acquired by local Chinese. Tax incentives
will be granted for certain high-technology R&D activities. Regional
headquarters located in the Pudong New Area will be offered financial subsidies
equivalent to a portion of their income tax, VAT and business tax. The
percentage depends on the type of industry.
It is also expected that new supporting regulations will be introduced in the
areas of cash and treasury management.
However, as the Shanghai
regulations became effective only on July 20, supporting regulations dealing
with the incentives have yet to be finalised. It is not entirely clear at this
stage how the incentives will work in practice. Nonetheless, MNCs intending to
open a regional headquarters as their strategic gateway to China and the
Asia-Pacific region should carefully review the new regulations when
determining the right location for their base.
This article was written by Matthew Wong, a partner at PricewaterhouseCoopers
Shanghai and China
leader for the firm's tax management and process services.