- 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.
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.