Most Read Contributor in Hong Kong, September 2016
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
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
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
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.
The original email legal update is copyright Johnson
Stokes & Master at the date written first above. All rights
reserved. This publication provides information and comments on
legal issues and developments of interest to our clients and
friends. The foregoing is intended to provide a general guide to
the subject matter and is not intended to provide legal advice or a
substitute for specific advice concerning individual situations.
Readers should seek legal advice before taking any action with
respect to the matters discussed herein. Please also read the JSM
legal publications Disclaimer.
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