The process of settling international service-related payments will soon be simplified when a new circular issued by China's State Administration of Foreign Exchange (“SAFE”) takes effect on September 1, 2013. The new circular, together with detailed implementing rules (Circular Hui Fa  No. 30) (collectively, “Circular 30”), streamlines existing foreign exchange rules relating to cross border payments between service providers and their respective clients. The rules will apply to a range of service related payments, including service fees, advances and expense reimbursements (collectively, “Service Related Payments”).
The key features of Circular 30 are as follows:
- The general principle of Circular 30 is to loosen regulatory restrictions on Service Related Payments that are based upon genuine and lawful transactions.
- For Service Related Payments in an amount equal to or less than US$50,000 per transaction, the onshore payor entities are generally no longer required to submit supporting documentation for the approval of the remitting banks as a condition precedent to completing the remittance. If the nature of the funds is suspect or ambiguous, banks may still request the payor entity to submit underlying transaction documents for review.
- For Service Related Payments in an amount exceeding US$50,000 per transaction, supporting transaction documents (such as the underlying service contracts, invoices and other documents evidencing that the transactions are genuine and lawful) are still required to be submitted to the remitting bank for approval. For example, in order for an onshore company to reimburse its offshore affiliate for advances made by the offshore affiliate, the remitting banks will need to review and verify the underlying transaction contract, any advance or reimbursement agreement and the payment invoices related thereto. In addition, the term of the advance payment(s) shall not exceed 12 months.
- Under existing regulations, a bank cannot process a request for a foreign exchange payment without sighting a tax clearance certificate showing that the onshore payor has paid the relevant withholding taxes with respect to the payments. Circular 30 has eliminated the requirement for a tax clearance certificate for Service Related Payments in an amount equal to or less than US$50,000. Although the existing rule will continue to apply to Service Related Payments over US$50,000 per transaction, the tax authorities are no longer required to conduct an examination of the documents submitted, or to assess the amount of withholding taxes with respect to the payment. Instead, the tax authorities will acknowledge the filing form by affixing a chop on the form, which will allow the remitting bank to directly process the requested payment upon receipt of the chopped filing form.
- Subject to SAFE’s approval, which will be determined on a case by case basis, an onshore company engaging in the trade of services may now be allowed to retain in its offshore account foreign currency income that has been lawfully earned from its service business, provided that the total amount of such income that may be kept offshore does not exceed 50% of the company’s total income generated from the service trade in the immediately previous year. Prior to Circular 30, onshore service trading companies were required to remit all of their foreign exchange service trade income back to China and either retain the income in their onshore current accounts or convert/settle the funds into RMB.
Statistics from the foreign exchange authorities suggest that approximately 88% of payments under trade in services are below US$50,000. As such, Circular 30 is expected to enhance the efficiency of a substantial amount of foreign exchange payments in the service sector.