Zhong Lun Law Firm Beijing Shanghai Shenzhen Guangzhou Wuhan Chengdu Tokyo Hong Kong London New York Robert Lewis 11 June 2013 China Cloud-based Services Structure Options
Cloud-based services in China The main commercial structuring considerations for SaaS/Iaas/PaaS in China are the same as outside China The regulatory regime in China presents some important new twists
Who needs to know China cloud rules? MNCs with China subsidiaries using globally-sourced cloud-based services offerings Cloud-based services providers with China users o o Early stage start-up with footprint in China (to be more attractive acquisition target) Major global cloud services operator looking to access China market
Key structuring issues for the China cloud Where are the servers located? Place and currency of payment? Who owns the customer relationship? o o Major accounts (MNCs in China, major SOEs, etc.) SMEs
Key regulatory issues for the China cloud What licenses are required? What privacy rules apply?
Key elements of China cloud structures Servers o o offshore not regulated in China onshore need licensed IDC/ICP operator partners Customer relationship o reseller vs. agent vs. no face-to-customer Technology o supply of h/w, licensing of s/w and provision of tech support services are not regulated
If you need a license, can you get one? THE LAW vs. THE PRACTICE Under relevant Chinese law (and China s WTO commitments): Sino-foreign equity joint venture VATS entities (foreign-invested telecommunications enterprises (or FITEs)) are permitted Foreign equity share is capped at 50% Requires approvals from Ministry of Commerce (MOC), Ministry of Industry and Information Technology (MIIT) and other departments (culture, publishing, advertising, etc. as applicable) But in practice: MIIT rarely issues VATS licenses to Sino-foreign equity joint ventures (only a handful of FITEs in >10 years, compared with >2000 multi-province licenses for purely domestic companies) Even in rare case where MIIT approvals are obtained, other approvals cannot be obtained as a practical matter Most foreign investors prefer not to be subject to the 50% investment cap so use common work-around structures
If you can t get a license, what do you do? Offshore China Nominee shareholder controls Nominee shareholders Board of directors Weak-spot: so-called vertical nominee shareholder controls Foreign Party 100% WFOE Supply/ license/ services Captive domestic VATS operator s dividends revenue revenue Wholly foreignowned enterprise Cohosting VATS operator Internet data center Typical VIE/nominee shareholder structure: Traditional workaround structure Validity increasingly now called into question Not necessary for cloud business?
China Roll-out of Global SaaS Offering SaaS SP Global Saas Contract MNC global customer Data center Offshore Cloud Service Web Portal Onshore SaaS SP China entity Provide non-regulated bundled services to s Provide on-the-ground customer support Onshore internet connectivity China BTO Provide SaaS services to China End Users on cross-border basis China End User (MNC sub) Key structure elements: Servers located offshore SaaS SP China entity provides unregulated bundled services and customer support in China Question: who bills the customer in China?
Traditional Offshore Model #1 SaaS SP Data center Key structure elements: Servers located offshore SaaS SP China entity provides unregulated bundled services and customer support in China Question: who bills the customer? Offshore Cloud Service Web Portal Onshore SaaS SP China entity Provide non-regulated bundled services to s Provide on-the-ground customer support Onshore internet connectivity China BTO (MNC sub) (SOE) (POE) Provide SaaS services to s on cross-border basis
Onshore Model #1 Offshore Onshore SaaS SP HQ SaaS SP China SaaS technology license SaaS H/W and S/W supply SaaS technical services China VATS Partner Co-location of servers (title held by SaaS SP or VATS partner) Host and maintain web portal Sign SaaS service contract with End Users Issues bills to s IDC operator Cloud Service Web Portal Key structure elements: Internet connectivity SaaS SP China entity (1) is the SaaS technology partner, (2) provides unregulated services directly to s, and (3) owns the overall customer relationship. The China VATS Partner (1) holds the license, (2) provides the portal, and (3) runs the formal contract/billing relationship. China BTO Non-regulated bundled services contract w/ s Overall relationship management (MNC sub) (SOE) (POE)
Prime Contractor Onshore Model #2 Offshore Onshore SaaS SP HQ SaaS SP China SaaS technology license SaaS H/W and S/W supply SaaS technical services Key structure elements: SaaS SP China entity (1) signs the prime contract for the SaaS offering directly with the s, acting as the reseller of the VATS portion, and (2) provides all of the SaaS technology support to the China VATS partner for the service. The China VATS Partner (1) holds the license, and (2) provides the portal, all on a subcontract basis. IDC operator China VATS Partner Co-location of servers (title held by SaaS SP or VATS partner) Cloud Service Web Portal Internet connectivity China BTO Host and maintain web portal Cloud-base service prime contract with End Users SaaS SP China acts as reseller of regulated services provided by China VATS Partner (MNC sub) (SOE) (POE)
Onshore BTO/VATS Partner Model Offshore Onshore SaaS SP HQ Key structure elements: SaaS SP China entity provides all of the SaaS technology support to the China VATS partner for the service. The China BTO/VATS Partner (1) holds the BTO/ VATS licenses, (2) provides the data center hosting, portal, and internet connectivity, all on a prime contract basis. IDC operator SaaS SP China Co-location of servers (title held by SaaS SP) China VATS China BTO SaaS technology license SaaS H/W and S/W supply SaaS technical services Host and maintain web portal Cloud Service Web Portal Internet connectivity Cloud-base service prime contract with End Users (MNC sub) (SOE) (POE)
China data privacy issues Servers o offshore not subject to China s data privacy rules o onshore must comply Basic requirements o Personal information broadly defined o Disclosure requires user consent o Illegal collection, sale, provision or use of personal information may trigger criminal liability o Online businesses are responsible to maintain security of personal data
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Thanks for your kind attention! Robert Lewis Zhong Lun Law Firm robertlewis@zhonglun.com