The somewhat tentative and gradual progress in the permitted activities for holding companies is reflected in the number of changes and the provisional nature of the regulations. The Decision has affected more than 20 Articles and made 15 discrete changes to the previous regulations. It is expected that the changes will have significant impact on encouraging multinational companies to set up or further expand the functions of holding companies in China.
The important modifications for holding companies include:
- Expansion of the means of capital contribution
The expanded means of capital contribution include Renminbi ("RMB") profits and RMB legal earnings.
The Decision provides that foreign investors may make capital contribution to holding companies in the form of freely convertible currencies, RMB profits derived from China or lawful RMB earnings derived from share transfer, liquidation or other activities. Chinese investors may make capital contribution with RMB. If foreign investors make capital contribution to holding companies making lawful RMB earnings, they are required to submit the relevant documents and tax payment certificates. The capital contribution shall be paid within two (2) years after the business license is issued.
Previously, the "Provisional Regulations" required foreign investors to make their capital contribution in the form of freely convertible currencies.
As the nature of a holding company is to invest in and provide managerial services to its invested companies, this change may serve to encourage the use of holding companies and the reinvestment of "lawful" profits in China.
- Expansion of the scope of business
The scope of business of a holding company can be divided into two parts: the business that can be conducted upon the establishment of the holding company and the business that can be conducted once certain prescribed conditions are met, such as fully contributing the minimum required capital contribution of USD 30 million.
The first type of business scope of a holding company includes the following activities:
(1) invest in the areas that foreign investors are allowed to by the Chinese government;
(2) being entrusted by the holding company's invested companies in writing (with an unanimous resolution of the Board of Directors) to provide the following services to the invested companies:
A. assist or act as an agent of the holding company's invested companies to purchase in China or offshore plant and machinery and office equipment for the invested companies' own use, raw materials, spare parts, components that are necessary for production, and the sale of the products manufactured by its invested companies in and outside of China and to provide after-sales service;
B. after approval by, and under the supervision of, the foreign exchange administration authorities, balance the foreign currency among its invested companies;
C. provide services including technical support, staff training, and personnel management during the course of its invested companies' product manufacturing and their sales and market development;
D. assist its invested companies to seek loans and to provide guarantees for its borrowings;
(3) establish R & D centers or departments, engage in research and development of new and hi-tech products, transfer the research and development results and provide relevant technical services to its invested companies; and
(4) provide consulting services to its investors; provide services of relevant market information, investment strategy, etc., to its affiliates.
The initial scope of business is substantially the same as that formally available according to the "Provisional Regulations" and the "Supplementary Regulations" and the "Supplementary Provisions II". Items (1), (2) C and (4) are, however, significant changes brought about by the Decision, with Item (1) probably being the most important to foreign investors.
Now we will have a look at business that can be conducted once certain prescribed conditions are met. If a holding company operates legally, does not violate the law, and its registered capital is paid in as scheduled in its Articles of Association, the registered capital actually paid in by investors does not be less than USD 30 million and has been used to invest in the invested companies, upon the examination and consent of the foreign economic and trade departments of the province, autonomous region, municipality or separately-planned city where the holding company is located and the approval of MOFTEC after the application is submitted to MOFTEC, the holding company may engage in the following types of business as required by its operational activities:
(1) To be entrusted by the holding company's invested companies in writing (with an unanimous resolution of the Board of Directors) to conduct the following businesses:
A. to sell products manufactured by its invested companies for distribution in China and offshore markets; and
B. to provide comprehensive transportation, storage and other services to their invested companies.
(2) To export domestically-manufactured products not subject to export quotas or export license, as an agent or a distributor, or by establishing an export procurement institute;
(3) To sell products manufactured by its invested companies in and outside of China after systems integration. If the products manufactured by their invested companies cannot fully meet the needs of systems integration, purchase of auxiliary products for system integration inside or outside of China is allowed, provided that the value of the auxiliary products does not exceed fifty percent (50%) of the value of all products needed for systems integration;
(4) To provide the relevant technical training to domestic agents and distributors for the products manufactured by its invested companies, to domestic companies and enterprises that have technology transfer agreement with the holding company or its parent company;
(5) Prior to the operation of its invested companies or prior to their manufacture of new products, to import from its parent company limited quantities of products for test sale to develop the market. Products imported must be identical or similar to the products of the invested companies and must not be subject to import quotas;
(6) To provide operational leasing services for machinery and office equipment to its invested companies;
(7) To provide after-sale services for products manufactured by its parent company; and
(8) To participate in overseas projects contracting with Chinese enterprises who have the right to carry out foreign projects contracting according to the relevant Chinese regulations.
If applying to engage in the aforementioned businesses, a holding company shall submit the following documents to the examination and approval authorities:
(1) application letter executed by the legal representative of the holding company;
(2) Board resolution of the holding company;
(2) revised Articles of Association of the holding company;
(3) approval certificate (photocopy), business license (photocopy) of the holding company and capital verification report issued by a China-certified public accountant; and
(4) capital verification report for the invested companies issued by a China- certified public accountant.
The main changes are:
- Items (6), (7) and (8) are additional areas of permitted business;
- In Item (2), reference to export by way of "agent, distributor or establishing export procurement institutions" has been added.
The changes are significant, not only because of the new opportunities now available for a holding company, such as expanded trading rights, but also for the increased efficiency of management and capital use that will flow from the more effective role of a holding company.
- Increased borrowing capability
According to the Decision, if a holding company's registered capital is not less than USD 30 million, its borrowing capability shall not exceed four (4) times of its paid-up registered capital. If a holding company's registered capital is not less than USD 100 million, its borrowing capability shall not exceed six (6) times of its paid-up registered capital. If the holding company intends to take out loans more than the aforementioned amount out of its operational needs, the application must then be submitted to MOFTEC for approval.
Under the previous regulations, this ceiling was 4 times of the paid-up registered capital if the registered capital was not less than US$ 30 million. The requirement for MOFTEC approval for borrowings exceeding the given limit has remained.
- Ability to hold unlisted legal person shares
Article 2 of the "Supplementary Provisions" only permitted holding companies, as a promoter, to establish foreign-invested companies limited by shares or to hold unlisted legal person shares in foreign-invested companies limited by shares, but did not permit holding companies to hold legal person shares in other companies limited by shares. The Decision removed this restriction.
According to the Decision, a holding company may act as a promoter to establish foreign-invested companies limited by shares or hold unlisted legal person shares in foreign-invested companies limited by shares. A holding company may also hold unlisted legal person shares in other companies limited by shares in China in accordance with the relevant regulations of China. A holding company shall be regarded as overseas promoter or shareholder of the company limited by shares.
- Increase in ceiling on the ration between the amount of imports for use in systems integration or market testing products and the foreign currency component of the registered capital of the holding company, its foreign exchange profits or borrowings.
The ceiling on the ration between the amount of imports for use in systems integration or market testing products has been increased from 20% to 35% of the foreign currency component of the registered capital of the holding company, its foreign exchange profits or borrowings.
According to the Decision, a holding company shall go through the relevant formalities and use the foreign currency in its registered capital, foreign currency profits or overseas foreign currency loans to import the systems integration and market testing products. The amount of the aforementioned import shall not accumulate to exceed thirty-five percent (35%) of the foreign currency in its registered capital per year. The margin between the import amount of the current year and thirty-five percent (35%) of the foreign currency in its registered capital cannot be extended to the next year.
Although RMB capital contributions are now permitted, this ratio for imports is still calculated with reference to foreign exchange held or available and limits the benefits that flow from RMB investment.
