China's Ministry of Commerce ("MOFCOM") and State
Administration of Foreign Exchange ("SAFE") jointly
promulgated a notice on December 8, 2011 which clarifies the
situation created by an earlier, initially unpublished SAFE notice
with respect to reinvestment of income by foreign-invested holding
companies in China.
The Earlier Notice
The earlier SAFE notice (huizihan  No. 7,
entitled Notice of SAFE's Capital Projects Management Section
Concerning the Dissemination of Operational Guidance on Relevant
Issues Involving the Checking of Funds and Inspection of
Certificates for Reinvestment by Foreign-Invested Holding
Companies, "Document No. 7"), issued March 29, required
that all dividends, interest, liquidation proceeds and other income
received by the holding company be treated as an increase to its
registered capital before it can be reinvested in projects in
China. For our analysis of that notice, please see our August 2,
2011 Alert entitled,
"Foreign-Invested Holding Companies in China Newly Subject to
Unpublished SAFE Notice".
The requirement to reinvest income as registered capital was
seemingly inconsistent with central government policy to encourage
the establishment of foreign-invested holding companies and
hampered their efforts to invest in China. The requirement to
increase registered capital above the existing level (US$30 million
statutory minimum) before holding companies could reinvest proceeds
in China was inconsistent with the Company Law and central
government regulations governing the establishment and operation of
foreign-invested holding companies. It also substantially hindered
foreign investors' ability to repatriate profits earned by
holding companies as foreign investors are restricted from reducing
registered capital and because reserve funds are required to be
allocated based on registered capital before profits can be
Document No. 7 raised uncertainty and serious concern as to whether
foreign-invested holding companies would be forced to make
capital-inefficient reinvestments of their income, delaying or
reducing their ability to declare and repatriate dividends to their
shareholder(s). A number of foreign-invested holding companies put
investment plans on ice after the issuance of Document No. 7.
The New Notice
The new notice, entitled the Notice on Further Perfecting
Relevant Administrative Measures on Foreign-Invested Holding
Companies (shangzihan  No. 1078) ("Document No.
1078"), appears to resolve the issue and provide clear
Document No. 1078 provides that foreign-invested holding companies,
subject to commerce authority approval and local SAFE bureau
verification, may (a) directly reinvest dividends, recovered
investments, liquidation proceeds, proceeds from share transfers,
income derived from a reduction in investment and other legitimate
RMB proceeds earned in China, or (b) use the same to increase the
registered capital of holding companies before reinvestment. With
respect to the flow of funds, the document clarifies that after
receiving SAFE verification, the RMB proceeds may be wired directly
to the entities to be invested or first wired to the holding
companies and then wired to the entities to be invested.
Under this new document, holding companies are no longer required
to first increase their registered capital before they can reinvest
legitimate RMB proceeds earned in China. Rather, they can choose to
reinvest such RMB proceeds in China directly after obtaining
commerce authority approval and SAFE bureau verification.
Although Document No. 1078 does not expressly state that it
replaces Document No. 7, we understand that this is nevertheless
the case. Unlike Document No. 7, which was issued by SAFE alone,
Document No. 1078 was jointly promulgated by MOFCOM and SAFE, which
indicates that the two agencies have coordinated with each other on
their respective responsibilities.
Document No. 1078 also specifies that the Foreign Investment
Division of MOFCOM and the Capital Transactions Department of SAFE
are the two departments directly responsible for any questions that
may arise during the implementation of this document.
In addition to clarification on reinvestment, the document also
provides that foreign-invested holding companies may not use the
proceeds of domestic loans for reinvestment in China, which is
consistent with existing policies on debt/equity ratios of such
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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