New Rules Beef up Holding Companies: But Who is Buying?

Core Reforms

Subject to the satisfaction of certain criteria, holding companies can be granted the status of "regional headquarters" or "RHQs" (to be distinguished from the RHQs that are approved in Shanghai under municipal regulations). Together with such status, a holding company receives certain tangible business scope entitlements (in contrast to Shanghai RHQs). The most significant of these appears to be the right for a holding company to engage in importation from "the parent company of the group to which the holding company's investor belongs". This provision not only gives holding companies the right of importation from such a parent company, but also the right to sell the imported products in the PRC. It implies that holding companies can sell those products without applying for a business licence with explicit reference to wholesale or retail business within the business scope.

While the right of importation carries with it enormous potential significance, the parent company limitation is both intriguing and bizarre. It remains to be seen how strictly this provision will be interpreted.

An RHQ can also now import materials and components necessary for servicing products manufactured both by the offshore group and by the companies in which the holding company has invested in China (the investee companies). This complements the after-sales service function introduced in the 2003 amended regulations.

For holding companies that do not qualify as RHQs but have used up at least US$30 million of their registered capital, their importation rights are still limited to "market testing" and components for "integrated assembly", although their "yearly quota" has been increased from 35% of paid-up registered capital to total paid-up registered capital.

The Provisions also clearly state that "regional headquarters" can establish finance companies that can provide central treasury functions to the group in China, subject to the approval of the China Banking Regulatory Commission (CBRC). The MOC would presumably not include such a provision unless it had previously consulted with the CBRC, and discussions have been reportedly going on for some time. It is widely expected that the CBRC will issue a guidance on the pre-conditions for the approval of such finance companies.

Similarly, the Provisions allow RHQs to set up financial leasing companies. The conditions for establishing such companies (such as capitalization) would also be subject to regulation by the CBRC.

Non-core Reforms

The MOC has also added in other business scope sweeteners to RHQs that are less significant. RHQs can provide "outsourcing services" for foreign and domestic companies. While this can mean virtually anything, discussions with MOC officials indicate that they interpret "outsourcing services" to mean business process outsourcing, which refers to an enterprise outsourcing its internal operational processes, such as the provision of finance functions.

Outsourcing of services is important for some multinational companies. Large companies that were providing or planning to provide services such as the provision of data processing and HR services, but were unsure whether such activities were legal, no longer have to operate under such uncertainty. When an RHQ has added "outsourcing services" to its business scope, it would appear that RHQs can provide and charge for any kind of outsourcing services except for those expressly restricted by laws and regulations.

In addition, RHQs can provide logistics services generally, foreign project contracting and can engage in investment offshore. Presumably, the State Administration of Foreign Exchange will have the last word in respect of the latter. There is also scope for the MOC to approve the inclusion of other services within the business scope not listed in the provisions.

Under the Provisions, holding companies in which investors have used up at least US$30 million of registered capital can now set up operational leasing company subsidiaries. But this is not such an earth-shattering development, as they could previously provide such services themselves anyway.

Pre-conditions for Granting of RHQ Status

There are rather high thresholds that a holding company must satisfy to be accorded RHQ status and thereby obtain the most attractive business scope entitlements. As far as capitalization is concerned, there are two formulations