China: Shanghai eases RHQ regulations

The Shanghai Municipal Government has revised, for the fourth time, its regional headquarters (RHQs) regulations providing more impetus to multinational companies (MNCs) to run their RHQs in the city. The new regulations have taken effect from 1 November 2022. So far, Shanghai is home to 877 RHQs since the launch of its RHQ regulations in 2002, making Shanghai the city with the most RHQs in China. 

The main amendments bought by the 2022 regulations are summarized below. 

1. New addition and relaxation 

The 2022 regulations have added a third type of RHQ entity, called the RHQ business unit, and introduced some relaxation to the shareholding requirements for RHQ entities. RHQ business unit refers to a Shanghai registered entity set up by an MNC (or its Chinese investment holding company) based on its line of functions, business, products, brands or services, authorized to oversee its investment, management, and servicing in China or the region. The following table highlights the latest changes to the RHQ recognition requirements.

2. Improved assessment mechanism 

Changes are made to delegate more rights to district-level authority and to clarify the assessment mechanism.

3. More explanatory notes 

The 2022 version provides further clarifications on the application documents for RHQ recognition, especially the application form. An applicant is required to provide a more comprehensive description of its shareholding and management structure. In addition, an enterprises seeking an “RHQ – business unit” recognition is required to provide special audit materials on its parent company's business units and operating revenue. 

4. More supportive measures 

The regulations have added more supportive measures to the 2019 version, as summarized below.
 

WTS China’s observation

Existing and new RHQs applicants should note the favorable changes, and consider how to optimize their operations to maximize the benefits, notably the following: 

• All three types of RHQ entities – not only RHQs – can now benefit from the incentives and supportive measures. Further subsidies and grants could be available from the district governments which are now given the discretion to formulate their own supportive policies. 
• In particular, Shanghai RHQ entities can enjoy the benefit of cross-border cash pooling, by virtue of the pioneering foreign exchange regulations, the "Facilitation Measures for Cross-border Funding of RHQs in Shanghai", issued by the Shanghai government in 2019. The said regulations facilitate the operation of domestic and foreign funds, enhance cross-border fund coordination, and reduce the exchange risk and financial costs of RHQs. 

It should be noted that new tax implications may arise while adjusting the operation to meet Shanghai’s RHQ requirements. For instance, tax revenue reallocation will result due to intra-group business restructuring. Therefore, a detailed tax implication study is advised prior to the implementation.