The Race for Regional Headquarters Takes Off

Foreign companies should compare local policy incentives to choose the best site for their regional headquarters in China.by James Yong Wang and Tony ZhangChina’s major cities have been competing to attract regional headquarters (RHQs) since the late 1990s. In 1999, Beijing was the first city to issue provisions that encouraged foreign-invested investment companies (FIICs) approved at the central level to establish RHQs in the city. (FIICs are companies established to hold and manage foreign-invested enterprises [FIEs] in China for their foreign parent companies.) Shanghai followed in 2002 with a new policy that encouraged FIICs and foreign-invested management companies to apply for RHQ status with lower capitalization requirements. Such competition has gained momentum in recent months, with Beijing and Shanghai updating their local policies to offer greater incentives. Multinational corporations (MNCs) that want to expand their operations in China may find it worthwhile to compare central and municipal incentives for establishing RHQs in different cities.

Strict central-level requirements

Since 2004, the Ministry of Commerce (MOFCOM) has allowed FIICs to apply for RHQ certification. Eligibility requirements are relatively strict.

• To qualify as an FIIC, an FIE must have at least $30 million in registered capital. Its foreign parent company must have at least $400 million in total assets, invest more than $10 million in paid-in registered capital, and have already established at least one FIE in China; or it must invest more than $30 million in paid-in registered capital and have already established at least 10 FIEs in China.
• To apply for RHQ certification, an FIIC must have at least $100 million in paid-in registered capital, or have at least $50 million in paid-in registered capital, as well as at least ¥3 billion ($439.4 million) in total assets and ¥100 million ($14.6 million) in total profits.
• The RHQ applicant should contribute at least $30 million of its registered capital to establish new FIEs, purchase equity in Chinese companies or FIEs established by its parent or affiliate company, or set up research and development (R&D) centers in China.
• The RHQ applicant must have already established one R&D center in China.

Companies that meet these requirements can take advantage of central-government incentives for RHQs. MOFCOM-certified RHQs may adopt an integrated onshore/offshore foreign-exchange (forex) management system (including integrated management of their onshore FIEs’ forex capital), offshore bank accounts to manage the forex capital of offshore affiliates, and approved overseas lending by onshore affiliates. They may also engage in operational and financial leasing, establish finance companies, and provide financial services to invested FIEs. Since these RHQs are approved at the central level, they can make investments anywhere in China regardless of their registration location.

Lower local-level thresholds

All FIICs approved by MOFCOM are eligible for RHQ certification in Beijing; Guangzhou, Guangdong; and Shanghai. To attract RHQs, the three local governments have issued new provisions in the past five years that offer greater incentives. Though the policies are similar in structure, each city offers different incentives that reflect its economic profile.

Guangzhou joined Beijing and Shanghai in the race for RHQs in 2006, when it issued Provisions for Encouraging MNCs to Establish Regional Headquarters and Sub-Regional Headquarters in Guangzhou. Guangzhou set the lowest requirements among the three cities, allowing FIICs, management companies, R&D centers, and certain manufacturing FIEs to qualify for RHQ certification. (Only FIICs and management companies can become RHQs in Beijing and Shanghai.) Sub-RHQs, which manage only some of a company’s FIEs located in China, may also qualify for many RHQ benefits in Guangzhou. In June 2008, Shanghai revised Provisions for Encouraging MNCs to Establish Regional Headquarters in Shanghai, and a notice on implementation followed in December of that year.

Beijing revised its RHQ provisions in May 2009 and issued implementing rules in June that clarified incentive policies, including reduced certification thresholds, various cash bonuses and financial support, and preferential treatment for employees. Beijing offers the largest cash bonuses to RHQs and relaxes requirements for certification if the applicant is a “world-renowned” MNC (see Tables 1 and 2). Though the revised rules improved the city’s attractiveness when competing with other locations—including Guangzhou, Hong Kong, Shanghai, and Singapore—Beijing is the only city that requires its certified RHQs to be the MNC’s highest management entity in China.

At the municipal level, Chinese employees of RHQs receive preferential treatment when applying for travel to Hong Kong, Macao, Taiwan, and abroad. Senior Chinese managers and technical staff receive preference for permanent resident status in Beijing and Shanghai. Foreign RHQ employees are also given priority when applying for multiple-entry F visas, work permits, or permanent residency permits, depending on their level of employment. RHQs certified in Beijing and Shanghai may receive preferential treatment in customs declaration and quarantine and inspection.

In practice, district-level governments in Beijing, Guangzhou, and Shanghai may grant certified RHQs preferential treatment, including potential tax holidays, office leasing subsidies, and partial refunds of business tax, individual income tax, and enterprise income tax (see Table 3). Such arrangements may require discussions and negotiations with local governments on a case-by-case basis and are subject to change.

MNCs that are interested in setting up RHQs in cities other than Beijing, Guangzhou, and Shanghai may also receive similar preferential treatment. So far, Nanjing, Jiangsu; Shenzhen, Guangdong; Tianjin; and Xiamen, Fujian, have issued incentive policies to encourage the establishment of RHQs in their cities. Even in cities that have not released incentive provisions, MNCs may still be able to negotiate preferential treatment with local governments. Companies looking to expand or consolidate their China businesses should carefully compare local incentives to identify the most suitable site for their RHQs to take advantage of the best preferential treatment packages.

[author]James Yong Wang is shareholder, and Tony Zhang is legal consultant, at the international law firm Greenberg Traurig, LLP. They are based in Shanghai.[/author]