With the launch of the US-China trade war, it should go without saying that China is tough on foreign internet companies doing business in China. Foreign SaaS (Software as a Service) companies are on the front lines of China’s internet and the legalities of their operating in China are complicated and generally unfavorable.
Our China lawyers who focus on China’s internet typically send out some variant of the following email to foreign SaaS companies to give them an initial lay of the China SaaS land:
The basic position of the PRC government regarding foreign SaaS is as follows :
1. Provision of SaaS services to Chinese nationals through a server maintained outside of China is not legal.
2. Storage of personal information gained during the processing of SaaS services on servers located outside of China is generally not legal.
3. The PRC enforces these above two rules in the following two ways:
a. Conversion of RMB for payment for offshore server SaaS services is not permitted.
b. The URL allowing contact to the offshore server is subject to being blocked. Use of a VPN to access a blocked server is illegal.
Unlike France and some other European countries, China does not typically seek to enforce its laws through extraterritorial action. 3 a. and b. are generally the only methods of enforcement used. However, these methods are very effective.
Many companies operate in this illegal realm, knowing they will likely not be pursued by the Chinese government in their home country. As long as they (the company and anyone who China might associate with the company) stay out of China, this attitude is probably rational. However, it is not usually possible to build a real business this way. But this “offshore server” approach is usually considered to acceptable by companies without real long-term interest in China.
To operate legally in China, a PRC based server is required and the arrangement requires licensing to a Chinese owned entity. This is the approach Microsoft and Apple use for their China Cloud/SaaS products. Setting up Cloud/SaaS operations in China with this sort of licensing approach is complex, but it is necessary and for that reason it has become very common.