It is universally acknowledged that Chinese enterprises are required to go through the following Chinese regulatory procedures prior to directly investing overseas: Overseas Investment Project Approval or Filing with the National Development and Reform Commission ("NDRC") or provincial development and reform authority ("DRC approval/filing"); Overseas M&A Preliminary Report to the Ministry of Commerce and the State Administration of Foreign Exchange (or local provincial commerce administrative authority and local provincial foreign exchange administration department); Overseas Investment Approval or Filing with the Ministry of Commerce or provincial commerce administrative authority; and Domestic Institution Overseas Direct Investment Foreign Exchange Registration with bank at the registered place of the Chinese enterprise.
Against the above, a number of Chinese enterprises wonder "Can we pay overseas fees for performance bond, bid security, office rental, staff, engaging overseas intermediary institutions to provide services, etc. before establishment or acquisition of an overseas enterprise and completion of the above-mentioned Chinese regulatory procedures?"
Under the current Chinese regulations, it is possible for Chinese institutions (including Chinese enterprises) to remit upfront expenses ("Upfront Expenses") overseas prior to making an outbound direct investment, provided that:
- The Chinese institution shall complete "Domestic Institution Overseas Direct Investment Upfront Expenses Registration" with a bank at its registered place.The accumulated amount of the Upfront Expenses shall in principle not exceed USD 3 million and 15% of the total investment amount of the Chinese investor.If, due to objective reasons, the accumulated amount of the Upfront Expenses exceeds USD 3 million or 15% of the total investment amount of the Chinese investor, the Chinese investor shall submit a written explanation to the foreign exchange bureau at its registered place, and the foreign exchange bureau will collectively review the case.
- Where a Chinese investor fails to complete an overseas investment project within 6 months after the outbound remittance of the Upfront Expenses, it shall report to the foreign exchange bureau at its registered place regarding the use of the Upfront Expenses and return the remaining funds. If there is any objective reason, the Chinese investor may apply to the original registration bank for extension by submitting a written explanation, upon the bank’s consent, the aforesaid 6-month period may be extended up to 12 months.
- Article 17 of the Administrative Measures on Overseas Investments by Enterprises (promulgated by NDRC on 26 December 2017 and effective as of 1 March 2018) provides that "Where the upfront expenses (including performance bond, handling charge for letter of guarantee, intermediary fee, resource exploration fee, etc.) needed for a project are of a relatively large amount, the investor may apply for approval or filing of the project's upfront expenses in accordance with Article 13 and Article 14 hereof. The approved or filed upfront expenses shall be counted in the investment amount of the Chinese investor."But there is no definition of "relatively large amount", and the literal interpretation of "may" is that a Chinese investor is not obligated to apply for DRC approval/filing of any upfront expenses. The investor may wonder if it needs to apply to DRC in addition to applying to the bank or the foreign exchange bureau?According to our telephone inquiry with NDRC, a Chinese investor needs to undergo DRC approval/filing only once for an outbound investment project; however, if the relevant bank requests the DRC approval/filing document for the upfront expenses of an overseas investment project, the Chinese investor shall provide it to the bank. This, however, does not appear to be practical in most cases as an investor may incur expenses overseas when collecting the information for the DRC project application.
In view of the above, we suggest a Chinese enterprise check with the relevant bank whether a DRC approval document/filing notice is required to be submitted when applying for "Domestic Institution Overseas Direct Investment Upfront Expenses Registration" of an overseas investment project.