Beijing opens a foreign umbrella

PUBLISHED : Sunday, 23 April, 1995, 12:00am
UPDATED : Sunday, 23 April, 1995, 12:00am

CHINA will this week publish regulations governing the establishment of foreign holding companies in an attempt to attract higher-quality investors in the mainland.

The move is an apparent change of heart by Chinese authorities, who have previously been reluctant to spell out clear guidelines on foreign investment, and will plug a three-year legal vacuum for multinationals in China.

The regulations have been drafted by the Ministry of Foreign Trade and Economic Co-operation (MOFTEC), the body responsible for managing foreign investment in China.

A holding company allows foreign firms to group all their investments, including joint ventures and wholly owned projects, together under a single legal corporate umbrella.

Many multinationals have established holding companies in China over the past three years. But up to now foreign firms have been deprived of any clear guidelines on how they should go about establishing the umbrella companies.

One lawyer said: 'In the past, they [foreign companies] might have been given approval to set up a holding company on the basis of how well known the company was.' Unlike joint ventures, which can manufacture only approved products, a holding company is able to combine existing investments such as sales, distribution, foreign exchange and market research under one legal entity.

Dutch electronics giant Philips is believed to have been the first multinational to set up a holding company, in 1992. Chinese premier Li Peng gave his personal approval after meeting with Philips' chief executive.

Accountants and legal experts are divided on whether the new regulations will result in multinationals from Europe and the United States clamouring to set up holding companies.

John Kuzmik, partner of law firm White & Case, said he did not think there would be a flood of applications once the regulations were put in place.

However, Edward Shum, a partner at Coopers & Lybrand, said he believed there would be a number of foreign firms submitting applications in the next few months.

The regulations were directed at well known multinational companies, which China was welcoming with open arms, a local analyst said.

'The same officials in Beijing are getting more selective about the type of investment they will allow and far more fussy about the credentials of the investor,' said one lawyer at an American law firm.

Recent reports indicate that the State Council is formulating a new policy on foreign investment.

This seems to reflect the central authorities' campaign in recent years to attract major corporations rather than small companies, which tend to invest in export ventures and real estate development.

The Government said the drop in the number of new foreign investment agreements signed last year was because of its desire to upgrade the quality of foreign investors.

Only big companies such as Unilever, Siemens, IBM, McDonald's and General Electric will be able to come up with a minimum US$30 million in registered capital to satisfy the new holding company regulations.

There are also other criteria, including the injection of all capital within two years of the issue of a business licence. The holding company must also have at least three subsidiary enterprises, or plans for three substantial investments.

The holding company can engage in manufacturing, selling, research and development, and investing in subsidiary companies, but not trading.

MOFTEC has granted permission for holding companies to sell products they manufacture themselves, but does not allow them to sell their subsidiaries' products.

'Previously, substantial investors have been enjoying the benefit [of holding companies] in practice. Now the regulations just make it legitimate,' said Mr Kuzmik.

'There are some hassles in the application procedure and it would only appeal to those companies wanting to put their subsidiaries under a single administration.' For companies that prefer a centralised management and administration, setting up a holding company will help to provide support services to its subsidiaries. This is desirable for the companies because the cost of the services can be shared.

Mr Kuzmik said the new rules were 'tax neutral'. Some accountants suggested they would encourage foreign companies to reinvest tax refunds.

Foreign firms can apply for a refund on their capital reinvestment in the mainland at a rate of between 40 and 100 per cent, depending on the project.

'The holding company rules will enable foreign firms to have better control over the timing of their refund,' said Mr Shum.