Hong Kong: Holding Company Law in the PRC

Last Updated: 26 September 1995
This article is intended to provide a general guide to the subject matter. Specific advice should be sought about individual circumstances. Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.

The following article summarises the legislation applicable to holding companies in the PRC.

The Interim Provisions on the Establishment of Investment Companies by Foreign Investors ("Provisions") issued by the Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") came into effect in April 1995. The Provisions give foreign investors a new vehicle through which to invest in the PRC, an "umbrella" holding company (termed "investment company" in the Provisions) through which interests in subsidiary operations (termed "invested companies" in the Provisions) may be held.

An investment company may be either a wholly foreign owned enterprise or a sino-foreign joint venture.

The capital requirements of an investment company and its investors

There are strict requirements for the establishment of an investment company. Beside the general requirement that the investors should have a good credit standing, there are several other capital requirements:-

1. the foreign investor shall have either:

(i) total assets of no less than US$400 million in the year immediately proceeding the application for the establishment of an investment company; paid in a minimum of US$10 million into the registered capital of the enterprises already established by it in the PRC; and obtained the approval of the PRC authorities in respect of three or more future projects; or

(ii) established in the PRC 10 or more enterprises in the sector of production or infrastructure; and paid in a minimum of US$30 million into the registered capital of the enterprises;

2. the PRC partner to the joint venture, if this is the case, should have total assets of at least RMB 100 million;

3. the minimum paid-in registered capital of investment company must be US$30 million. This must be paid up within 2 years of the issue of the business licence to the company.

Business scope

The business scope of an investment company may include the following:

1. to invest in sectors which are encouraged and permitted by the State;

2. to provide its invested companies with the following services:

(i) to assist or to act as agent for its invested companies in the import and export of goods and the provision of after-sales service;

(ii) with the approval and the supervision of the State Administration of Exchange Control ("SAEC"), to balance foreign currency needs between its invested companies;

(iii) to assist its invested companies in the recruitment of staff and the provision of technical training, marketing and consultancy services;

(iv) to assist its invested companies in obtaining loan financing and the provision of guarantees in relation thereto;

3. to provide consultancy services to its investors;

4. with the approval of the People's Bank of China ("PBOC"), to provide financial support to its invested companies.

An invested company is an enterprise of which at least 25% of its registered capital is held by the investment company or the investment company and other foreign investors.

The following points may be noted.

1. The Provisions allow an investment company to invest in permitted sectors, but do not expressly state whether it can do so directly in its own name or through its invested companies.

2. It is not stipulated expressly in the Provisions as to whether an investment company, since it may act as an import-export agent for its invested companies, automatically will be granted import-export rights or whether it will have to go through an import-export agent. This may be contrasted with the position under the Foreign Trade Law issued in 1994 which provides that a foreign invested enterprise may have import-export rights only in respect of goods necessary for its own production and not for the purpose of on-selling to other parties as agent (which will be the case of an investment company importing-exporting as agent for its invested companies).

3. An investment company may assist its invested companies in the recruitment of staff. The meaning of "assist" here is vague. It is doubtful whether staff can be moved freely within a group of invested companies, since such flexibility would be difficult to accommodate within the existing regulatory framework for labour recruitment.

4. An investment company may balance foreign exchange between and provide financial support to its invested companies upon approval by the SAEC and the PBOC respectively. But it is unclear under which circumstances the approval can be granted and whether an investment company can do so directly or may have to go through banks or other financial institutions designated by the authorities. Furthermore, the scope of the "financial support" is unclear and uncertain.

5. Although an investment company may obtain and guarantee loans for its invested companies, it is unclear whether it may guarantee loans in both RMB and foreign currencies. Probably, the guarantees will need to be approved by the authorities (especially if it is a foreign exchange guarantee, which will need to be approved by the SAEC).

Tax treatment

There are no specific provisions on the tax treatment of investment companies. Probably, the tax regime applicable to foreign investment enterprises generally will apply to an investment company.

Of note is that an investment company may be subject to double taxation, ie., income tax may be levied in respect of the income of (and paid by) its invested companies while withholding tax may be levied in respect of the dividends paid by the invested companies to the investment company. Clarification of the position is needed.

Duration of the investment company

The duration of the investment company is not specified in the Provisions. Under the laws applicable to foreign investment enterprises generally in the PRC, it is possible for a foreign investment enterprise to be established with unlimited terms except in certain industries.

Application and approval procedures

Documentation required for the application include the project proposal, feasibility study, articles of association and joint venture contract (if any) of the proposed investment company, credit references for the investors, evidence of any existing investments in the PRC and other documentation which may be required by the authorities.

The application should be submitted to the local MOFTEC branch for examination and approval. When the preliminary approval is given, a further application should be made to central MOFTEC for final examination and approval. After the issue of the final approval, the investment company may register with and obtain a business licence from the State Administration of Industry and Commerce.

Further information or advice may be obtained from Linklaters & Paines, Hong Kong office, 14th Floor, Alexandra House, Chater Road, Hong Kong; telephone: (852) 2842 4888; fax: (852) 2810 8133; contact David Mullarkey or Jeremy Parr.

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