MOFTEC Further Expands The Scope Of Business Of An Investment Holding Company Established By Foreign Investors In China

Written by Elaine Lo, Partner of Johnson Stokes & Master (5 Apr 2003)

Summary

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.

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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...