The battle for MNC investment heats up

Shanghai's Provisions

In 2008, Shanghai issued the Shanghai Municipality, Provisions on Encouraging the Establishment of Regional Headquarters by Multinational Corporations (上海市鼓励跨国公司设立地区总部的规定) and the Shanghai Municipality, Several Implementing Opinions on the «Shanghai Municipality, Provisions on Encouraging the Establishment of Regional Headquarters by Multinational Corporations» (上海市关于《上海市鼓励跨国公司设立地区总部的规定》若干实施意见). The Provisions were later repealed in 2011 when they were revised. The Opinions have also since been repealed with the recent promulgation of an updated version in August. Collectively, the Provisions and the Opinions make up the Shanghai Rules.

Compared with the 2008 Rules, the latest revisions relax the requirements for establishing a regional headquarters. They lower the threshold for preferential treatment and provide greater incentive policies. For example, MNCs which have made a prominent contribution to the local economic development and mostly satisfy the explicit conditions of the Rules, could be approved, at the discretion of the Shanghai Municipal Commerce Commission. In addition, subsidies of up to Rmb8 million ($1.2 million) are provided to encourage MNCs to establish or upgrade their existing regional headquarters to an Asia-wide, Asia-Pacific-wide or world-wide regional headquarters. Subject to the approval of relevant authorities, key regional headquarters in the form of an investment company may enjoy certain remuneration for the costs and expenses incurred during internal equity restructuring.

In some instances, the thresholds are tightened though. For example, a regional headquarters is required to employ no fewer than 10 employees to benefit from the start-up subsidy and the rental subsidy. It is also important to note that the new Shanghai Rules have validity periods, which will expire on June 30 2017.

Shenzhen's alternative approach

Compared with Beijing, Shanghai and Guangzhou, Shenzhen is late in the game to attract regional headquarters from a legislative and regulatory perspective. Since joining the race, Shenzhen has adopted a regime with its own characteristics to regulate regional headquarters, different from Beijing and Shanghai. The first legislation in Shenzhen was promulgated in late 2008 if the form of Trial Measures. The Measures categorised headquarters into three types, comprehensive, functional and growth. Each type of headquarters was subject to different recognition standards.

On August 31 2012, the Shenzhen Tentative Measures were published, repealing the Trial Measures. The Tentative Measures apply unified standards to enterprises for headquarters certification. This includes multinationals, domestic companies, investment companies or management enterprises. It is also significant that the department in charge of recognition is not the municipal commerce commission, as is the practice in Beijing and Shanghai. Instead, it is overseen by The Head Committee for the Economic Development of Headquarters (总部经济发展工作领导小组) jointly established with the Municipal Government and under the Department of Development and Reform. Shenzhen has adopted a different legislative and regulatory regime from Beijing and Shanghai in recognising and supervising the MNCs' regional headquarters.

Comparing the policies

Specific policies for regional headquarters vary in different localities due to their geographic locations and economic profiles. Click here to see a detailed comparison of the various local thresholds and incentive policies in Beijing, Shanghai and Shenzhen. It reveals that Shenzhen sets the highest certification thresholds, but offers the largest amount of cash bonuses. Shanghai, after issuing its latest Rules, stands out as having the most favourable economic and administrative environment for regional headquarters.

Extra incentives

Shanghai also offers a bonus for upgrading or restructuring a MNC's regional headquarters. Newly-established regional headquarters that cover all of Asia, the Asia-Pacific region or the world, with no fewer than 50 employees and the legal representative appointed by its parent and its key functional management permanently working in Shanghai can enjoy a Rmb8 million subsidy. MNCs that are already established can upgrade their headquarters to meet the same requirements to receive a Rmb3 million subsidy. Key regional headquarters of a foreign-invested investment company may enjoy certain remuneration for the costs and expenses incurred during its internal equity restructuring. This is subject to the review of the Municipal Commerce Commission, Municipal Financial Bureau and other relevant departments.

In Beijing, principal executives receive an annual cash bonus of up to Rmb500,000 in three successive years. If the incremental amount of locally retained enterprise income tax is within the top 10 in the city, the principal executive will also receive a Rmb500,000 bonus. A cash bonus of up to Rmb300,000 is also on offer to regional headquarters' Beijing-based senior executives above the vice-general manager level.

Beijing and Shanghai then offer preferential treatment when it comes to customs declarations and quarantine and inspection. They also offer to facilitate the administrative procedures of different functional departments for regional headquarters. Both cities encourage investment companies to set up finance companies to provide centralised financial management services to enterprises when they invest within China. Priority for expatriate employees to obtain their visa, work permits, employment certificates and Chinese permanent residency certificates are also included. Preferential treatment in issuing the city's permanent residency certificates to senior Chinese managers and technical staff is also available

Shanghai will help facilitate Renminbi current accounts and encourage commercial banks to provide more settlement and exchange services, while Beijing removes the one-year working restriction for foreigners wishing to buy property. It is likely that Shenzhen will issue similar preferential policies as part of its regulations, but details have not yet been released.

An economy of regional headquarters

There is no doubt that Shanghai enjoys the leading place in headquarters economic development. Well-known MNCs like GE, Johnson & Johnson and HSBC have all chosen Shanghai for their regional headquarters. Shanghai's aim is to explore more possibilities to benefit from regional headquarters by issuing the latest Rules. Shanghai also intends to encourage MNCs to upgrade their existing regional headquarters by offering financial support. This distinguishes Shanghai's Rules from Beijing and Shenzhen and means its leading position will continue. Shenzhen, despite its late start, has its own advantage due its close proximity to Hong Kong. If the Shenzhen government considered more incentive policies in the future, it could become a strong competitor to Shanghai. Beijing, as the capital of China, will always have an important place in the race for headquarters.

Recent legislation promulgated in Shanghai, Shenzhen and Jiangsu shows these cities are open to greater investment from MNCs. It remains to be seen how Beijing will respond to the new Rules in Shanghai and whether successive legislation will entice other cities in China to attract MNCs and their regional headquarters.

Wenyu Jin and Xiaolin Teng, Han Kun Law Offices, Beijing and Shanghai