Case Study: Using the Shanghai FTZ to Access the Outbound Tourism Industry

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By Maria Kotova and Kate Wang

A client in the tourism industry recently contacted Dezan Shira & Associates to advise them on how to best expand their scope of operations in the tourism industry. With the rise in income levels in China, outbound tourism has become one of the most profitable operations for travel agencies in China. The client, who had already engaged in domestic and inbound tourism in China for several years, requested that we investigate the options for foreign investment in the outbound tourism industry.

Pursuant to Article 21 of the Regulation on Travel Agencies (the “Regulation”) issued by the State Council on May 1, 2009, foreign investment in travel agencies is permitted for Sino-foreign equity joint venture (EJV) travel agencies, Sino-foreign cooperative travel agencies and wholly foreign-owned travel agencies, restricted to domestic tourism and inbound tourism only.

Further, according to Article 23 of the Regulation, “foreign-invested travel agencies shall not engage in overseas travel for Chinese mainland residents or business travel for Chinese mainland residents to the Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan.” Therefore, our client’s goal of expanding operations by adding outbound tourism to their business scope was determined to be impossible under the normal regulatory environment in China.

RELATED: Chinese Outbound Tourist Numbers To Double By 2020

However, our research discovered that China has been undertaking a related pilot program since 2011, following the issuance of the Interim Measures on the Pilot Operation of Overseas Tourism Businesses of Sino-Foreign Joint Venture Travel Agencies (the “Measures”) by the National Tourism Administration and Ministry of Commerce on August 29, 2010. According to Article 2 of the Measures, China shall gradually permit foreign-invested enterprises to engage in the overseas tourism business for Chinese residents on a pilot basis.

According to Article 7 of the Measures, the tourism administration authorities under the State Council shall select Sino-foreign joint venture travel agencies to engage in the industry and issue approval to eligible enterprises. Article 5 of the Measures, however, placed strict controls on the number of joint ventures permitted to take part in the pilot program, with the specific number to be determined by the tourism administration authorities under the State Council.

Based on a telephone consultation with officials from the National Tourism Administration, we learned that currently only three Sino-foreign EJVs have been permitted to engage in the pilot program (namely, TUI, JTB, and CITS American Express) and that the National Tourism Administration is unlikely to issue additional permits in the near future.

RELATED: Shanghai FTZ Revised Negative List Introduces Targeted FDI Reforms

With this option exhausted, we expanded the scope of our research to determine whether the Shanghai FTZ offered any preferential policies for foreign investment in the outbound tourism industry. After conducting research, we were pleased to inform the client that the FTZ specifically permits Sino-foreign EJVs to engage in outbound tourism. However, the FTZ’s Negative List requires that the EJV has held a license for domestic and inbound tourism for no less than two years, during which time it has not been fined by related government agencies.

OutboundTourism (2)

Based on our recommendations, the client chose to incorporate in the FTZ as an EJV travel agency and entered into a service agreement with DSA. Because the FTZ is located quite far from the city center, we advised that they register the company at a virtual address and maintain a physical address in downtown Shanghai. The client’s company is now expected to be able to obtain a license from the Shanghai Tourism Administration after two years of operations and become one of the first foreign-invested companies to enter the industry in China.

CB_2014_09_cover_90x125This article is an excerpt from the September 2014 edition of China Briefing Magazine, titled “Revisting the Shanghai Free Trade Zone: A Year of Reforms.” In this issue, we revisit the Shanghai FTZ and its preferential environment for foreign investment. In the first three articles, we highlight the many changes that have been introduced in the Zone’s first year of operations, including the 2014 Revised Negative List, as well as new measures relating to alternative dispute resolution, cash pooling, and logistics.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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