The E-commerce industry in China has seen an astonishing growth in the last decade. The growing demands of Chinese consumers have attracted a rising number of E-commerce companies who are seeking opportunities to enter into this lucrative market. Operating a business in China through an online platform has been a business expansion strategy for many foreign investors.
Besides the consideration of business risks, regulatory compliance is crucial to enter the Chinese market . Especially when the investor wishes to enter into specific sectors highly regulated by the Chinese authorities. The E-commerce industry is among these sectors and it is linked to the value-added telecommunications services governed by Telecommunications Regulations of the People’s Republic of China (hereinafter “Regulation”).
Once a company establishes an online platform in China and is looking forward to bringing it into the public domain, the ICP Filing (Internet Content Provider) is mandatory, because it allows the information provided on the platform to be accessible by the public. Please note that if the company wants to create income of that platform, it falls within the scope of the Regulation. The regulation requires companies engaging in telecommunication business to obtain a telecommunications business permit. Operating without this permit may result in a fine ranging from RMB 100,000 to RMB 1,000,000 or three to five times the illegal gains. Depending on the services provided on that platform, this permit may be classified as follow: ICP License (Internet Content Provider), SP License (Service Provider)、ISP License (Internet service provider)、EDI License (Electronic Data Interchange), etc. Because the EDI License is the most frequently used within the E-commerce industry. And the Special Administrative Measures (Negative List) for Access of Foreign Investment does not impose any restriction on the foreign-owned equity in Chinese E-Commerce companies, we are going elaborate on the EDI License in this article.
What is EDI License?
EDI (Electronic Data Interchange) License, whose official full name is the value-added telecommunications business operation license-online data processing and transaction processing (in Chinese “增值电信业务经营许可证-在线数据处理与交易处理业务”), is issued to companies operating business through a website/platform. The EDI License is needed for websites/platforms providing users with online data processing and transaction processing services through public communication networks or the internet. These services include three types: transaction processing platforms (such as E-commerce platforms, second-hand trading platforms, online food ordering platforms, ticket booking systems, etc. ), electronic data interchange platforms for exchange of business information (such as Business to Business EDI platforms) and network/electronic equipment data processing platforms (such as Machine to Machine communication platforms). However, it should be noted that not all E-commerce platforms have to file for an EDI License, only those where third-party sellers are involved are required to operate under this license. Companies creating a website to sell their own products do not need to apply for an EDI License, an ICP Filing will suffice. Hence, foreign-invested enterprises are suggested to investigate whether an EDI License is necessary before entering the E-commerce market.
What are the requirements of the application for EDI License?
Aside from the requirements that a company established in China should have enough funding (registered capital of at least RMB 100,000 for businesses operated within a province, an autonomous region or a centrally-administered municipality), management professional, credibility and/or capability to provide long-term services to users. Based on different administrative regions, there are other actual requirements (we take Shanghai Free Trade Zone as an example):
- The legal representative of the foreign invested enterprise must be Chinese national.
- The business scope in the business registration must contain “operating in telecommunications business” or other similar descriptions.
- A physical server is required for EDI license application and shall be located at the same place where the company is located. For example, if the EDI application is submitted to authorities in Shanghai Free Trade Zone, the server should be placed inShanghai Free Trade Zone.
- The social security payment records of at least three Chinese employees need to be submitted (at least for 1 month, and in special cases, it may be necessary to submit three consecutive months’ social security payment records).
- The newly established legal entity needs to have around 10 Chinese employees and specific roles/positions are necessary.
- The foreign investor or its subsidiary need to submit proof of their e-commerce experience (such as e-commerce website, App, screenshot, approval document, business contract, business transaction mode description, etc.).
- A cyber security department and supporting internal regulations are necessary.
Companies fulfilling all of the above conditions may file for the obtainment of an EDI License with the local telecommunications administration authorities. The required documents for the application may vary according to the rules made by different local authorities, and the documentation lists are available on their official websites. And all of the documents must be in Chinese.
Recently, due to the growing number of EDI applications, government regulations on Internet security have been tightened, which leads to increasing difficulties of the EDI application. We strongly suggest that companies who are considering applying for this license prepare for it well in advance to ensure the fulfillment of the conditions and the completion of documentation.
More information
Should you have any questions on the EDI License or the procedure, please contact our China Practice Mr Job Bezemer (jbz@kneppelhout.nl) and Mr Victor Zheng (vz@kneppelhout.nl).
