Member Article

The Ministry of Commerce (“MOFCOM”) promulgated the Regulations on the Investment in and Establishment of Holding Companies by Foreign Business Entities on 17 November 2004. The Regulations, which became effective on 17 December 2004, revise regulations of the same name promulgated in 2004 (as discussed in the 2004.2 issue of China Legal Update) (the “Original Regulations”). Establishment requirements The Regulations have again lowered the requirements for establishing a holding company in China. A foreign investor can qualify to establish a holding company in China by satisfying one of two alternative sets of requirements. Under the first set of requirements, the foreign investor used to be required to have a total asset value of not less than US$400 million in the year prior to the application, to have established foreign investment enterprises in China with a paid-up capital contribution of more than US$10 million and to have plans for three or more investment projects. Under the revised Regulations, the investor is no longer required to have plans for such new investment projects. The revisions specify that if a holding company wishes to engage in commodity or technology import-export business, it must register in accordance with the Measures for Registration for the Record of Foreign Trade Operators (as discussed in the 2004.2 issue of China Legal Update). Similarly, a holding company that wishes to operate a commission agency, wholesale, retail or franchising business needs to comply with the Measures for the Administration of Foreign Investment in the Commercial Sector (as discussed in the 2004.3 issue of China Legal Update) and amend its business scope accordingly. Scope of business A holding company which operates lawfully, has no record of breaking the law, has paid its capital contributions on schedule and has actually paid up registered capital of not less than US$30 million may engage in an even wider range of business activities. The revised Regulations have expanded or redefined the scope of these additional activities. Such holding company may now provide after-sales services for all products that it imports. It is no longer limited to providing after-sales services for its overseas parent’s products. Further, such holding company may sell (but not retail) in China the products it has imported from its overseas parent. Reinvestment The revised Regulations specify that if a holding company invests in another enterprise in China and the proportion of investment attributable to foreign investors in that enterprise is less than 25% of the registered capital, the normal approval and registration procedures applicable to foreign investment enterprises will have to be followed unless other laws and administrative regulations provide otherwise. Regional headquarter A major innovation introduced by the Original Regulations was to permit a holding company to become recognised as the regional headquarter of a multinational company (hereinafter “regional headquarter”). The multinational company refers to the parent company of the group of companies to which the foreign investor in the holding company belongs. The revisions have somewhat relaxed the requirements for the establishment as a regional headquarter. Whereas originally one of the requirements was that the holding company had established two or more research and development institutions (of which at least one is a corporate entity), it now suffices to have set up one research and development institution. The scope of activities in which a holding company that has been recognised as a regional headquarter may engage has also been expanded. In addition to other activities, such holding company may now import and sell (but not retail) in China the products of the multinational company and the affiliated enterprises controlled by it. Such holding company may now also entrust other enterprises to manufacture or process its products or the products of the parent company and sell the same on the domestic and overseas market.