Is SAAS a value-added telecom service?

By Amy Deng, PacGate Law Group
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Software as a service (SaaS) is on the rise in the technology, media and telecommunication (TMT) industry, gradually drawing the attention of venture capital. In the SaaS business model, the service provider uniformly deploys application software on its servers and the client purchases the required application software services from the service provider and obtains the software service through the internet.

AMY DENG Partner  PacGate Law Group
AMY DENG
Partner
PacGate Law Group

Some SaaS services put online the traditional offline customized software services, while others provide online office software services to clients through the cloud. Notwithstanding the differences among the specific types of SaaS services, they all need to be realized through the internet. Therefore, whether or not an SaaS provider is required to obtain an internet content provider (ICP) permit may need the attention of SaaS providers and investors who are interested in this sector.

Pursuant to relevant provisions of the Administrative Measures for Internet Information Services, providing information that needs to be paid for to online users through the internet requires the obtaining of an ICP permit, whereas providing public and shared information that is free of charge to online users only requires ICP filing. Therefore, whether an SaaS service provider is required to obtain an ICP permit depends on whether the SaaS service can be classified as the “provision of paid information”.

Pursuant to the measures and the Notice of the Ministry of Industry and Information Technology on Issues Relevant to the Administration of Internet Information Services, “provision of paid information” means providing paid information to users for the purpose of making profit in commercial internet information services. However, there are no specific business types for provision of paid information explained in the measures. Pursuant to the Telecommunication Regulations, companies that operate value-added telecommunication services must obtain an ICP permit. Additionally, the Telecommunication Regulations specify that the scope of value-added telecommunication services must refer to the Classification of Telecommunication Services. That is to say, when deciding the service type of “provision of paid information”, companies must refer to the classification in the Classification of Telecommunication Services (2015 Version).

Value-added telecoms services in the above-mentioned classification are divided into Type 1 and Type 2. Two sub-types of Type 2, “online data processing and transaction processing services” and “information services” are most similar to the SaaS platform service.

First, does SaaS fall into the sub-type of “online data processing and transaction processing services”? This type of service means a service where a data or transaction/matter processing application platform linked to a public communication network or the internet is used to provide online data processing or transaction/matter processing services to users. Specifically, this includes transaction processing services, electronic data exchange services and network/electronic equipment data processing services. An Electronic Data Interchange (EDI) permit is required to engage in the provision of such services.

Pursuant to the Circular of the Ministry of Industry and Information Technology on Removing the Restrictions on Shareholding Ratio Held by Foreign Investors in Online Data Processing and Transaction Processing (Operating E-commerce) Business, dated 19 June 2015, such services mainly refer to operating e-commerce. Further, based on consultation with the Ministry of Industry and Information Technology, EDI permits are mainly targeted at such e-commerce platforms as JD.com, Taobao, etc. In contrast with the e-commerce platform, which provides trading platforms for buyers and sellers, SaaS provides software services directly to end users and generally lacks the functions of collecting and processing parties’ transaction information. From this it can be seen that SaaS does not fall within this sub-type.

Second, does SaaS fall into the sub-type of “information service”? This type of service means the service of providing information to users over the internet through the collection, development and processing of information and the construction of an information platform. This mainly includes information publishing platforms and delivery services, information search and look-up services, information community platform services, real-time information exchange services, information protection and processing services. From this it can be seen that information services mainly involve the provision of services. However, what SaaS users acquire through an SaaS platform are software services and what they pay for are also software services, rather than information. Accordingly, SaaS does not provide any information referred to as the “information services” and thus does not fall within this sub-type.

The essence of SaaS lies in offering software services and charging for such services. Based on this model, SaaS providers are only changing the channel by which they sell their own software services, rather than providing information and charging for this. Pursuant to the Notice of the General Office of the Ministry of Commerce (MOFCOM) on Issues Relevant to the Administration of the Approval of Investments by Foreign Investors in Projects for Sales Through Such Means as the Internet and Vending Machines, in essence, online sales is the extension of offline sales. If an enterprise uses its own network platform to directly engage in the sale of merchandise, it needs to file with the telecoms authority.

Accordingly, an enterprise that sells its own products through its own platform does not require an ICP permit, but requires ICP filing. Although the MOFCOM notice only addresses goods, and does not cover the provision of services, we would argue that the sale of one’s merchandise over the internet in essence is identical to the provision of one’s software services over the internet, and thus only requires ICP filing.

If a provider provides information services or other value-added telecoms services through SaaS, its provision of such information services or other value-added telecoms services will fall within the scope of the corresponding service in the classification. And if it charges for the provision of the corresponding value-added telecoms services, it will be required to obtain an ICP permit or other service permit.

Amy Deng is a partner at PacGate Law Group

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