Key Points

  • SAFE has streamlined its foreign exchange control on capital account
  • Foreign exchange control for transferring of domestic non-performing assets to foreign investors streamlined
  • Control for upfront fees of foreign direct investment by domestic institutions relaxed
  • Extension of overseas loans of domestic enterprises sees relaxed foreign exchange control

The State Administration of Foreign Exchange (“SAFE”) has further  adjusted and streamlined its foreign exchange control on capital  account by issuing the Notice of State Administration of Foreign  Exchange on Further Improving and Adjusting Foreign Exchange  Control Policies for Capital Account (the “Notice”) on January 10,  2014, which took effect on February 10, 2014.

Highlights of the Notice

Streamlining Foreign Exchange Control for Remittance of Profits  out of China

SAFE simplified the requirement of documents verification for  remittance of profits out of China last year through issuance of the  Guide on Foreign Exchange Administration for Service Trade (the  “Guide”) and the Detailed rules for Implementing the Guide on  Foreign Exchange Administration for Service Trade (the “Rules”). In  accordance with the Guide and the Rules, if the amount of profits  remitted out of China by a foreign invested enterprise (“FIE”) to its  foreign investor is not more than US$50,000 inclusive, the bank  will not require any documentary verification. If the amount is more  than US$50,000, the bank shall verify the board resolution of the  FIE approving the allocation and remittance of the profits, the FIE’s  capital verification report, the FIE’s latest auditor’s report and the tax  payment receipt evidencing payment of the withholding tax.

The Notice further streamlines the foreign exchange control for  remittance of profits out of China by FIEs by providing that for  remittance of profits of more than US$50,000, the bank will verify the  board resolution of the FIE and the tax payment recipient only and  will not ask for the FIE’s capital verification report and auditor’s report  for verification.

In addition, the Notice also eliminates the limitation that the amount  of profit to be remitted to a FIE’s foreign investor in one year shall  not exceed the total amount of the “dividends payable to” plus the  “declared but unallocated profits” of the foreign investor for the  relevant year as indicated in the FIE’s latest auditor’s report. In other  words, an FIE may remit any amount of profits out of China to its  foreign investor at any time as long as the board of directors of the  FIE has approved such allocation and remittance and the withholding  tax has been paid.

Streamlining Foreign Exchange Control for Transferring of Domestic  Non-Performing Assets to Foreign Investors

The Notice abolishes the requirement that financial asset management  companies shall obtain pre-approval from SAFE for foreign exchange  receipts and payments with respect to foreign disposal of domestic  non-performing assets. For the foreign exchange income obtained  from the foreign disposal of the domestic non-performing assets, the  financial asset management company can apply directly with the bank  to open a special foreign exchange account to reserve the foreign  exchange income, or they can choose to settle the foreign exchange  income, without pre-approval from SAFE.

If a foreign investor purchases domestic non-performing assets and  then disposes the non-performing assets in China, for the income the  foreign investor obtains from disposal of the domestic non-performing  assets, the foreign investor may apply with the bank directly for  purchasing and remittance of foreign exchange, without the need to  apply for pre-approval from SAFE. If the foreign investor becomes  the beneficiary of the guarantee of the non-performing assets due to  the foreign investor’s purchasing of the non-performing assets, such  guarantee will not be regarded and regulated as external security  under Chinese applicable laws and regulations.

Relaxing Foreign Exchange Control for Upfront Fees of Foreign Direct  Investment by Domestic Institutions Overseas

Pursuant to the Notice, if the total amount of the upfront fees for  foreign direct investment by domestic institutions in overseas  does not exceed US$3 million and is not more than 15% of the  total investment amount proposed by the domestic institution, the  domestic institution may apply for upfront fee registration with  local counterpart of SAFE by submitting its business license and  organization code certificate only. If the total amount of the upfront  fees exceeds US$3 million or 15% of the domestic institution’s total  investment amount, other than its business license and organization  code certificate, the domestic institution shall also submit to SAFE  other documents evidencing the domestic institution’s genuine  involvement in the foreign direct investment, such as the written  application the domestic institution submitted to the foreign authority  in charge of foreign direct investment.

If the domestic institution fails to receive the approval from the  foreign authority for the foreign direct investment within six months  after remittance of the upfront fees, the domestic institution shall  report to the local counterpart of SAFE concerning how the upfront  fees have been used in overseas and wire the remaining fees back to  China. The domestic institution may apply with the local counterpart  of SAFE to extend the six-month period up to 12 months based on  solid reasons.

Further Relaxing Foreign Exchange Control on Extension of Overseas  Loans of Domestic Enterprises

The Notice has expanded the scope of domestic enterprises that are  allowed to extend overseas loans to foreign companies. Domestic  enterprises were only allowed to provide their wholly owned  overseas subsidiaries or their overseas shareholding companies with  loans before taking effect of the Notice. Under the Notice, domestic  enterprises are now permitted to extend overseas loans to any  foreign companies that have an equity relationship with the domestic  enterprise. In other words, a domestic company will be able to  provide overseas loans to another overseas company which is under  the same control as this domestic company, previously forbidden  prior to the Notice.

Domestic enterprises are currently subject to a 30% limitation for  the overseas loans they can provide. The overseas loans provided  by domestic enterprises shall not exceed 30% of the domestic  enterprise’s equity interests. If the domestic enterprise does have  need to increase such percentage, they can apply for increasing the  percentage with the local counterpart of SAFE under the Notice, and  no need to seek final approval from SAFE anymore.

SAFE also has canceled the requirement that the overseas loans  quota registered with SAFE’s local counterpart has a validity of two  years. According to the Notice, domestic enterprises may apply  for the term of the overseas loans quota based on their business  needs. In addition, if the domestic enterprise is unable to recover  the principal and interests of its overseas loans it has extended, the  domestic enterprise may apply for deregistration of such overseas  loans with the local counterpart of SAFE based on solid reasons.

Streamlining Foreign Exchange Control for Financing Leasing Companies Engaging in Foreign Financing Leasing Activities

Pursuant to the Notice, financing leasing companies engaging in  foreign financing leasing activities shall register the incurrence of  external credit with the local counterpart of SAFE within 15 working  days. They can open a foreign exchange account with the bank  directly for reserving the foreign exchange rent income or they may  choose to settle the foreign exchange income, without the need to  obtain approval from SAFE. In addition, financing leasing companies  incurring external credit are not subject to the limitation of overseas  loans quota of domestic enterprises.

Financing leasing companies referred hereby include foreign invested  financing leasing companies approved by the Ministry of Commerce  of China, financing leasing companies approved by China Banking  Regulatory Commission (subject to regulatory rules applicable to  financial institutions) and domestic financing leasing companies  jointly approved by the Ministry of Commerce of China and the State  Tax Bureau.

Conclusion

We have seen SAFE’s continuous efforts to improve and adjust  its foreign exchange control in both capital account and current  account, which will encourage foreign direct investment in China to  some extent. For example, SAFE’s effort on streamlining the foreign  exchange control on remittance of profits by FIEs to their foreign  investors may provide foreign investors willing to invest in China with  some comfort, as one of the major concerns foreign investor usually  have is that they will not be able to wire profits out of China at the  end of the day.