The Shanghai Municipal Government is endeavouring to encourage more multinational corporations to set up regional headquarters in Shanghai by relaxing the criteria for their registration.
On 19 December 2011, it issued amended Provisions of Shanghai Municipality on Encouraging Multinational Corporations to Establish Regional Headquarters.
The amendments grant the government authority more discretionary power when reviewing a company's application for registration as a regional headquarters.
The government may draft new 'implementation rules' for the new provisions but we do not expect these to significantly change how the provisions work in practice. The 'headquarters economy' is a key plank of the Shanghai Municipal Government long-term strategy and one it will only continue to strengthen going forward.
Background - Setting up a regional headquarters in Shanghai
According to Shanghai Municipal Government provisions, a regional headquarters may take one of the two following forms:
(a) A wholly owned company for the purpose of investment (ie, a China holding company).
Setting up a China holding company is governed by a separate set of regulations issued by the Ministry of Commerce, which provide in detail specific requirements on the registered capital amount, credit standing, asset value, current presence in China and so on. Given that the provisions and requirements for setting up a China holding company are quite strict, an established China holding company can directly apply for recognition as regional headquarters without additional conditions.
(b) A wholly-owned management company.
This type of company may integrate operational functions such as management, research and development, funds management, sales, logistics and support services.
In order to be recognised as a regional headquarters, a management company has to satisfy the following conditions:
- its parent company has total assets valued at not less than US$400 million;
- the aggregate registered capital invested in China by its parent company is not less than US$10 million, and the number of enterprises in China and abroad that the parent company has authorised it to manage is not less than three; or the number of enterprises in China and abroad that the parent company has authorised it to manage is not less than six; and
- its registered capital is not less than US$2 million.
Changes to certification of 'regional headquarters' under the amended provisions
The amendments relax the requirements for wholly-owned management companies to qualify as a regional headquarters. In addition to the conditions set out in (b)(ii) above, the provision now includes the following:
'for the foreign invested management companies that basically meet the above qualifications and have made great contributions to the local economic development, the decision for the application of such companies will take into consideration the specific circumstances.'
No criteria are given to assess 'great contribution' nor is there any indication to what extent the contribution to the local economy will be considered. This grants significant discretionary power to the regulatory bodies to assess and approve regional headquarters.
It is possible, for example, for the Shanghai Municipal Government to grant a management company regional headquarter status if it does not meet the specific requirements but has made great contributions to the local economy.
Incentives and benefits
The Shanghai Municipal Government offers a number of incentives and benefits to multinational corporations setting up their regional headquarters in the city.
The amended provisions remove awards to representatives and other senior management of the companies, but grant subsidies to the eligible companies that set up Asia, Asia-Pacific or even broader regional headquarters in Shanghai. The eligibility for such subsidies are pending the new implementation rules, being drafted by the Shanghai Municipal Government and expected to be issued soon.
Other incentives and benefits, which include the following, remain unchanged:
Regional headquarters in the form of a China holding company that are newly registered in, or newly relocate to, Shanghai are granted RMB5million as start-up assistance. This is paid in tranches of 40%, 30% and 30% over three years from the year of registration in or relocation to Shanghai.
Newly registered or newly relocated regional headquarters that lease office premises for their own use are granted rent allowance for three years, at a rate of 30% of a daily rent of RMB8 per square meter based on an office area of 1,000 square metres. If the regional headquarters constructs office premises for its own use, it is granted funding assistance in one lump sum equivalent to the total three-year amount for premises rent allowance.
Performance- based awards
If a regional headquarters in a form of China holding company is recognised by the Ministry of Commerce as a state-level regional headquarters of a multinational corporation, the company is granted a one-time incentive of RMB10million, provided that its annual revenue exceeds RMB1billion for the first time in the year after recognition.
A regional headquarters in the form of a management company is granted an incentive of RMB5milion, provided its annual business revenue exceeds RMB500million for the first time after its certification.
These incentives are paid over three years at a rate of 40%, 30% and 30 % respectively.
Other benefits granted to regional headquarters include:
- simplified customs clearance when importing and exporting goods
- simplified entry and exit procedures for Chinese and foreign employees.