China’s Ministry of Commerce (MOC) and the State Administration of Foreign Exchange (SAFE) jointly issued a circular on 12 December 2011, which clarifies that a Chinese holding company (CHC) is permitted to reinvest its share of China-source dividends without having to increase its registered capital (Notice on Further Strengthening the Administrative Measures on Foreign Invested Holding Companies (Shangzihan `2011` No. 1078, hereinafter "Circular 1078")).
Article 3 of Circular 1078 provides that:
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A CHC is allowed to reinvest its China-generated RMB income derived from dividends, early withdrawal of an investment, liquidation, equity transfer or capital reduction directly in China subject to the approval by the local SAFE; or
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A foreign investor can use the income as a contribution to or increase of the registered capital of its CHC before the income is reinvested in other entities in China.
It is implied that an increase of the registered capital of a CHC with the above income derived by the CHC is an option rather than a mandatory action.
However, it should be noted that Circular 1078 requires that the following documents/information be submitted to the local SAFE for approval of the reinvestment plan:
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Application;
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Foreign Exchange Registration IC card;
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Approval document issued by the Ministry of Commerce on the domestic investment by the CHC;
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Supporting documents for the source of RMB funds, i.e. the documents that should be submitted by the foreign investor when applying for a domestic reinvestment or capital increase using income from dividends, early withdrawal, liquidation, an equity transfer or capital reduction; and
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The latest capital verification report and audited financial statements.
Once the local SAFE reviews the documents and grants approval, the CHC is allowed to have the RMB funds wired directly to the investee entity's bank account. Alternatively, the RMB funds can be first wired to the bank account of the CHC and then wired to the investee entity's bank account.
Article 2 of Circular 1078 also provides that a CHC is not allowed to make a reinvestment with the domestic borrowing funds.