PRC Government Revises Reinvestment Approval Processes for Foreign-Invested Holding Companies

PRC government officials addressed some foreign company concerns about their ability to expand their investments in China. Last month, the Ministry of Commerce (MOFCOM) and State Administration of Foreign Exchange (SAFE) released a new notice that regulates foreign-invested holding companies and foreign exchange. The notice, released December 8, 2011, restricts foreign-invested holding companies from reinvesting funds gained from domestic loans and effectively overrides a previous internal SAFE circular that had sought to require foreign companies to increase their registered capital before reinvestment in China.

The Notice on Further Strengthening the Administrative Measures on Foreign Invested Holding Companies, also known as Circular 1078, covers three main areas:

• Monitoring and auditing Commercial departments at all levels should examine and audit foreign-invested holding companies’ statistical data.
• Domestic loan reinvestment Foreign-invested holding companies’ domestic loans cannot be reinvested domestically.
• Reinvestments allowed after approval  Foreign invested holding companies may obtain their renminbi profits, advanced recovery of investment, and equity shares within Chinese borders. After authorization from the local foreign exchange department, this income may be invested domestically.

Revisions to reinvestment rules
The new notice is a follow-up to SAFE Circular 7 issued on March 29, 2011, which sought to more tightly regulate approvals of funding sources for reinvestment. Of particular concern, the circular would have required foreign holding companies looking to use China-based income to fund investment to first increase their registered capital by the amount of their planned reinvestment before seeking approval from SAFE for reinvestment.
Foreign companies expressed concerns that Circular 7 would restrict foreign holding companies’ flexibility in allocating funds domestically and would directly affect budgetary planning. The circular posed potential complications to holding companies’ financial operations and SAFE’s opaque implementation of the document may have reflected internal miscommunication with MOFCOM, which handles broader investment approvals. In meetings with MOFCOM officials throughout 2011, US-China Business Council (USCBC) President John Frisbie and other USCBC staff expressed concerns about implementation of Circular 7.

Next steps
The new circular appears to take into account companies’ concerns with registered capital requirements. Since the document was jointly issued by MOFCOM and SAFE, it also effectively replaces the earlier internal circular released by SAFE. It remains to be seen, however, how Circular 1078 will be implemented at various levels of government. It is also unclear whether MOFCOM will issue additional policies to regulate foreign-invested holding companies’ operations and capital requirements. USCBC will continue to monitor these issues and notify member companies of new developments.

Required Documents and Approvals
A foreign-invested holding company may transfer renminbi (RMB) funds for reinvestment after receiving authorization from a local foreign exchange office. Circular 1078 requires the following documents before a company can reinvest funds:

• Written application;
• Foreign exchange registration Integrated Circuit (IC) card;
• Approval documents from the local department of commerce responsible for the company’s domestic investment;
• Proof of the source of the RMB funds or capital, with reference to documents submitted by the foreign-invested holding companies and their foreign investors--such as profits, advance recovery of investment, liquidation, and equity transfers;
• Recent reports on capital and financial audits with the corresponding foreign exchange cash flow auditing report attached.