- Under the current PRC foreign exchange control system, cross-border payments and receipts of non-trade current account items are generally not subject to any approval procedures. I.e. such remittances can be handled directly with banks. However, certain documentation with the handling banks shall be made in order to pay to abroad or use the remittances received from abroad. The documentation requirements vary depending on the nature of the underlying transactions (e.g. services, trademark licensing, dividend distribution and so on).
There are a few exceptions where an approval from the competent local State Administration of Foreign Exchange (“SAFE”) will be necessary. E.g. if the non-trade current account item has not been specified by SAFE regulations, i.e. it belongs to “other non-trade current account items”, SAFE approval shall be obtained for remittances with an amount of above USD 50,000.
- In order to facilitate cross-border payments and receipts of remittances for non-trade current account items, on 18 July 2013 the SAFE issued the Notice on Circulation of Foreign Exchange Administration Regulations regarding Non-Trade Current Account Items (“Huifa  No. 30”). These new rules will become effective on 1 September 2013. The term “non-trade current account items” refers to all current account (as compared to capital account) items excluding trade in goods. Non-trade current account items include service fees, royalties, interests, dividends, expense reimbursements, fees for technology import and export (i.e. technology transfer fees), expenses of representative offices of foreign companies, etc.
The above Notice includes three appendixes, i.e. the Guidance on Foreign Exchange Administration of Non-Trade Current Account Items (“Guidance”), the Implementing Rules of the Guidance, and the List of Abolished SAFE Regulations.
The Guidance and its Implementing Rules replace various and its Implementing Rules replace various old SAFE regulations (in total 49 circulars) and provide new rules which aim to facilitate payments and receipts under non-trade current account items.
- The main contents of the Guidance and its Implementing Rules are as follows:
a) Approval procedure for outbound payments is completely abolished for non-trade current account items.
Currently, SAFE approval is required only under some exceptional circumstances. E.g. SAFE approval shall be obtained for payment of non-standard items (i.e. those belonging to “other non-trade current account items”), if the remittance is above USD 50,000.
Such approval requirement is completely abolished by the Guidance and its Implementing Rules. I.e. for all non-trade current account items, no SAFE approval is needed for outbound payments in the future.
b) Value threshold of 50,000 USD regarding documentation review
Non-trade current account payments and receipts are currently subject to documentation with the handling banks. Such requirement aims to prevent cross-border money flow without real transaction background.
Under the Guidance and its Implementing Rules, the documentation requirement still exists. However, the Guidance and its Implementing Rules generally exempt such requirement if a remittance is below USD 50,000 (or equivalent amount in other currencies). Nevertheless, if the payer or recipient deliberately splits a payment into several remittances (each below USD 50,000) to avoid the documentation requirement, it risks certain punishment from the SAFE in the form of penalties up to 30% of the remittance amount. In severe cases, the penalties may be above 30%.
c) Simplified documentation requirement
Same as in the past, depending on the nature of the underlying transaction, different documents are required to be presented to the handling banks for payment and receipt of remittances for non-trade current account items.
However, the Guidance and its Implementing Rules in general require less supporting documents than in the past. Under PRC law, certain cross-border transactions are required to be registered / filed with or approved by various governmental authorities. E.g. a trademark license agreement shall be registered with the State Trademark Office; a technology import agreement shall be registered with the competent Authority of Commerce. The registration certificates issued by these authorities shall be submitted to the handling banks when making the relevant outbound payments. The Guidance and its Implementing Rules no longer link such certificates to payments to abroad (with the exception of import and export of restricted technology where an import and export license issued by the competent Authority of Commerce is still requested for remittance purposes).
d) Tax documents
Under current regulations, for outbound payments for non-trade current account items, if the remittance amount is above USD 30,000, a so-called Tax Confirmation Letter (specifically for foreign exchange payment purpose) shall be submitted to the handling bank. Such Tax Payment Confirmation Letter shall be issued jointly by the competent State Tax Authority (“STA”, in charge of Corporate Income Tax and VAT) and Local Tax Authority (“LTA”, in charge of Business Tax and Individual Income Tax).
Under the Guidance and its Implementing Rules, the above Tax Confirmation Letter will no longer be necessary. Instead, if one single outbound remittance is above USD 50,000, the remittance itself shall be recorded with the competent STA. The relevant recordal form confirmed by the competent STA shall then be presented to the handling bank before the remittance can be made. The detailed rules about tax recordal for outbound payments are set out by a joint Announcement issued by the State Administration of Taxation and the SAFE on 9 July 2013. The Announcement provides some exceptions where the tax recordal requirement is exempted (e.g. outbound payment of overseas travel expenses, exhibition fees, conference fees, etc.).
For the first remittance (above USD 50,000), both the contract and the recordal form (in three copies) shall be submitted to the STA. For future remittances (above USD 50,000) only the recordal form shall be submitted to the STA. Upon receipt of the recordal documents, the STA shall immediately confirm by affixing its seal on the recordal form and return one copy to the payer. The STA shall keep one copy and send the other copy to the LTA. Both tax authorities shall review the tax payment status within 15 days after recipient of the recordal form.
Compared with the old rules, the payer now only needs to deal with the STA in order to get the necessary tax document for remittance purpose and no longer also with the LTA. Further, the tax-check from the tax authorities’ side occurs only afterwards. Such changes are expected to facilitate the payment process.
e) Receipts under non-trade current account items can be deposited overseas
The Guidance and it Implementing Rules allow Chinese companies (including both domestic and foreign invested companies) to keep their foreign exchange revenue received under non-trade current account items in their off-shore bank accounts. I.e. they are allowed to use off-shore bank accounts to receive the relevant payments from overseas parties. However, in order to do so, there are certain conditions to be met (i.e. the company has regular off-shore payment needs; it has sound SAFE compliance records in the recent two years; its non-trade current items are related to trade in goods, etc).
f) SAFE monitoring
Under the new rules, the local SAFE will focus more on the monitoring of the overall cross-border money flows of companies by using their on-line monitoring system. If they identify abnormalities, the SAFE will ask for explanation from the company and may launch an investigation where necessary.
- The new SAFE regulations are expected to enhance cross-border non-trade transactions by loosening document requirements concerning payments. Documentation requirements for cross-border payments are a huge administrative burden for many transactions. Thus, the new regulations are a positive step forward. It is advisable for Chinese companies and their foreign business partners to pay close attention to these regulation changes. Of course, it still needs to be seen how these new regulations will be implemented by tax authorities and banks in practice.