Written by Elaine Lo, Partner of Johnson Stokes & Master (5 Apr 2003)
The Ministry of Foreign Trade and Economic Co-operation ("MOFTEC") (now replaced by the Ministry of Commerce) recently issued a decision (the "Decision") to amend and clarify the Tentative Provisions relating to the Establishment of Companies with an Investment Nature by Foreign Investors (the "Investment Company Provisions"), promulgated by MOFTEC on 4 April 1995, and the two Supplementary Provisions issued by MOFTEC in August 1999 and May 2001 respectively to supplement the Investment Company Provisions. The Decision will become effective on 7 April 2003.
1. Currency to be used for payment of Registered Capital
Article 4 of the Investment Company Provisions originally required a foreign investor to contribute capital in an investment holding company in a freely convertible currency. The Decision has now relaxed this rule by providing that the foreign investor may also use Renminbi funds which are legitimately obtained by the foreign investor inside China for payment of the registered capital of an investment holding company. Such Renminbi funds include dividends paid to the foreign investor in respect of its other investments in China, Renminbi sale proceeds derived by the foreign investor from the sale of shares or equity interest in PRC companies, and distributions in Renminbi received by the foreign investor as a result of the liquidation of PRC companies in which the foreign investor has an investment. The foreign investor will be required to provide documentary evidence proving the source of its Renminbi funds and also certifying the full payment of taxes in respect of those Renminbi funds, when applying for approval to invest those Renminbi funds as the registered capital of an investment holding company.
2. Increasing the Debt to Equity Ratio
The Decision reiterates the previous Supplementary Provisions that where the registered capital of an investment holding company is not less than US$30 million, the total borrowings of such investment holding company may not exceed 4 times the amount of its registered capital. The Decision further provides that if the registered capital of an investment holding company is not less than US$100 million, then the aggregate amount of its borrowings may go up to (but cannot exceed) 6 times the amount of its registered capital. The debt to equity ratio prescribed for investment holding companies is, therefore, higher than that allowed for ordinary foreign-invested enterprises (which is 3 times the amount of registered capital).
3. Acting as Promoter of a Company limited by Shares
The Decision confirms that an investment holding company may act as promoter to promote a foreign-invested company limited by shares or hold the non-public legal person shares in such company. The Decision further states that an investment holding company may also hold the non-public and non-tradable legal person shares in other PRC companies limited by shares, and may also act as an overseas promoter or shareholder of such other PRC companies.
4. Scope of Business expanded
The Decision consolidates all the business activities which are permitted to be undertaken by an investment holding company pursuant to the Investment Company Provisions and the two Supplementary Provisions. While these earlier legislation permitted an investment holding company to undertake some of those business activities only on behalf of enterprises in which it owns at least 10% of the registered capital (such as acting as distributor or sales agent, and providing transportation, warehousing and logistics services, for investee companies in which it owns at least 10% of the registered capital), the Decision no longer imposes such requirement. Hence, all permitted business activities or services can now be undertaken for or provided on behalf of all investee companies regardless of the percentage of equity interest or shareholding held by the investment holding company in such investee companies. This represents a further relaxation of the rules restricting the business activities which may be carried out by an investment holding company.
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