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Software As A Service In China. Houston, We Have A Problem.

Posted in China Business, Legal News

The following email from one of our China lawyers to a client [revised slightly to knock out any identifiers] was cc’ed to me the other.  I am running it below because it succinctly sets for the issues of selling software as a service (SaaS) in China.  The email was in response to a client asking us about selling its software as a service in China.

The short answer is that foreign companies cannot provide software as a service in China. That means it cannot be done from an overseas entity with a server located outside China or from a WFOE with servers located within China. If SaaS is being provided in China by other foreign-owned entities (as you say), it is either being provided with payments being made overseas, or through some sort of license or VIE. We have in the past drafted the required agreements for a licensed arrangement. (If SaaS were possible in China for foreign-owned companies, Microsoft, Oracle and Amazon would be all over the issue. They are not, and it is not due to a lack of interest.) Needless to say, your emails raise complicated questions in a difficult and evolving area of Chinese law.

Additionally, if cloud computing is going to be part of your WFOE’s business in China, we will need to secure new approval from the government because the scope of your WFOE does not presently provide for  this.

We say all of the above not to dissuade you, but to make clear that providing cloud computing services in China is not a business decision to be made on a whim. Over the past several years we have had several people in China tell us there is an easy and generally available solution for foreign companies attempting to engage in the cloud computing/SaaS sector. So far, it has never been true. At the recent Chinese Communist Party’s Third Plenum, the Party said that they intend to eliminate all restrictions on foreign participation in the e-commerce market. They did not indicate that intentions applies to SaaS/cloud computing/Internet-based education and the like. It appears to us that by “commerce” they mean nothing more than selling goods on the Internet. And, even though the Party made this statement, there has been no subsequent mention of any rule changes that would allow such participation.

Note that your old model of having the software installed on a server owned by [Chinese entity] and located on the [Chinese entity's] premises remains valid, and would not require any changes to your WFOE’s business scope.

Please don’t hesitate to contact me should you have any questions or wish to discuss further.

  • Burke Wise

    Thank you for this post. Interesting protectionism to say the least.

    You wrote that if a SaaS model is being used, “it is either being provided with payments being made overseas, or through some sort of license or VIE. We have in the past drafted the required agreements for a licensed arrangement.” Does that mean this approach is legal? If so, what kind type of license are your referring to? Depending, it could look quite similar to a SaaS subscription. In any case, if it is legal to do it in the way mentioned above, that suggests some sort of process for a foreign entity or WFOE to do a SaaS model. Do I understand that correctly?

    Apologies for the differences in formatting. The paste seems to have thrown me off.

  • John Dietrick

    Does this apply to companies providing cloud computing resources (like AWS, Azure, etc.) only, or *any* web-based service platform with servers not owned by a Chinese entity? The term “SaaS” casts a wide net with rather unclear boundaries; what, specifically, is being restricted?