Navigating Regulatory Regime of Data Centres in China (I): – Licensing in China's Data Centre Industry

This series of articles cover the following topics and delve into these challenges and offer strategies to navigate the intricate Chinese digital landscape.

• Operation qualification
• Alternative routes for foreign investors to resolve qualification issues
• IDC construction
• Energy efficiency and environmental compliance
• Network and data security

In the first article, we provide an overview of the licensing requirements.

What are the types and categories of IDC licenses?

Telecommunications business in China is divided into the following two types while IDC license is a type of VAT license.

• basic telecommunications; and
• value-added telecommunications (VAT).

Based on the geographic scope of business the IDC distributes, there are two types of IDC licenses:

• Cross-regional License: Data centres whose scope of business cover multiple provinces, autonomous regions, or municipalities necessitate operators to obtain a VAT Business Operation License from the Ministry of Industry and Information Technology of China).
• Provincial License: In cases where data centre facilities are confined to a single province, autonomous region, or municipality, a VAT Business Operation License from the local telecommunications authority is required.

In addition, it's important to note that enterprises solely engaged in real estate leasing activities (including rental of factory buildings, power supply, fire protection, monitoring, refrigeration, safety precautions, etc.), are exempt from obtaining an IDC license.

However, businesses involving internet resource collaboration services (IRCS), rental of IT facilities (including database systems, racks, servers, storage, etc.) or the agency rental of communication lines and egress bandwidth, must obtain an IDC License.

What services can be provided under the IDC License?

The scope of business services delineated on an IDC License fall into three categories:

• IDC license (excluding IRCS): Operator may conduct IDC business other than IRCS business.
• IDC license (limited to IRCS): Operator may only conduct IRCS business.
• IDC license: Operator may conduct IDC business, including both IRCS and non-IRC business.

IRCS is defined as the use of equipment and resources set up on data centres to provide users with services through the Internet or other networks, such as data storage, Internet application development environment, Internet application deployment and operation management, etc. IRCS include cloud computing, cloud storage, cloud hosting, etc.

How to apply for an IDC license?

A. Application Process

The telecommunications business permit has transitioned into a post-industrial and commercial examination and approval matter. The applicant must firstly incorporate its company by obtaining a business license with a business scope including the intended telecommunications business (such as VAT business) and then apply for the approval of the telecommunications license (such as IDC license).

After submitting all materials, the review of IDC license process takes up to 60 days. If there are any issues in the application materials, applicants would be notified within 5 days for corrections. Approval on the applications for a Cross-regional or Provincial IDC License would be issued within 10 days after the decision date and the licenses would be valid for 5 years. As to disapproved application, the applicant would receive a written explanation on reasons.

Below is a flowchart that introduces the overall workstream for obtaining an IDC license.

B. Application Requirements for Domestic Investors

To obtain a VAT business license, domestic applicant needs to meet the following conditions:

1. It is a legally established company.
2. It has the funds and professionals suitable for its business activities.
3. It has the credibility for or capability of providing customers with long-term services.
4. For a Provincial License, its registered capital is 1 million RMB or more while for a Cross-regional License, its registered capital is 10 million RMB or more.
5. It has necessary sites, facilities, and technical schemes.
6. The company and its major investors and major business managers are not included in the list of enterprises with dishonest telecommunications business operations.
7. Other requirements as prescribed by the Chinese government.

C. Application Requirements for Foreign Investors

VAT business is not fully open to foreign investors. In addition to the above requirements for domestic investors, China currently implements an approval  regime imposing special requirements for different types of foreign investors:

• Foreign investors from Hong Kong and Macao: Hong Kong and Macao investors who meet "Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) " conditions can establish joint ventures in Mainland China to acquire an IDC license, with their stake capped at 50%. Meanwhile, such investors will also need to meet relevant operational and performance requirements.
• Foreign investors not from Hong Kong and Macao: According to the "Table of Concessions on Specific Commitments on Trade in Services" in Annex 9 of the "Protocol on the Accession of the People's Republic of China to the WTO" and the "Catalogue of Encouraged Industries for Foreign Investment (2022 Edition)", China has committed to opening up a few telecom business whilst data centre business was not specified therein. In practice, we have not seen foreign investors being approved with IDC license.
• Foreign shareholders of domestic enterprises listed overseas: Where a domestic Chinese enterprise listed overseas applies for the operation of telecommunications business, and the proportion of foreign equity in the domestic enterprise reaches 10% or higher, the requirements, examination and approval procedures for foreign investors are applicable. However, if the proportion of foreign equity in the domestic Chinese enterprise is (a) less than 10% and (b) the single largest shareholder is a Chinese investor, the requirements, examination and approval procedures for domestic investors are applicable.