Key Points

  • No approval for foreign exchange purchase and payment under service trade, which can be handed directly into financial institutions.
  • No requirement for trade documents verification for transactions under service trade with a value of US$50,000 or less.
  • Simplified requirement for trade documents verification for transactions under service trade with a value of more than US$50,000.
  • Cleaning up and integration of rules and regulations, abolishing more than 50 relevant rules and regulations replaced by the Guide and the Rules.
  • Relaxing Conditions for domestic enterprises to deposit overseas foreign exchange receipts under service trade and allowing enterprise groups to do so in a centralized manner.

Background

On 18 July 2013, the State Administration of Foreign Exchange (“SAFE”) issued the Notice to Print and Distribute the Regulations on Foreign Exchange Administration for Service Trade (Hui Fa [2013] No.30)(the “Notice”) to bring into force 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) from 1 September 2013.

The issuance of the Guide and the Rules signifies a reform of foreign exchange administration rules for the service industry by SAFE, with the purpose to promote and facilitate foreign exchange administration. The Notice abolishes around 50 rules and regulations currently applied to foreign exchange administration for service trade and purports to provide the financial institutions, domestic enterprises and individuals involved in the international service trade with a more systematic, clear and transparent legal basis.

In connection with the issuance of the Guide and the Rules, SAFE and the State Administration of Taxation jointly published the Proclamation on Tax Record-Filing of External Payment under Service Trade and Other Items (the “Proclamation”) on 9 July 2013, which will take effect from 1 September 2013. Under the Proclamation, domestic enterprises and individuals engaging in the international service industry need to provide the relevant financial institution with a Tax Record-Filing Form, instead of a Tax Certificate, when making a foreign exchange payment.

Highlights of the Rules

General Principal of Foreign Exchange Purchase and Payment Under Service Trade

SAFE does not impose a limitation on foreign exchange payments under service trade. Domestic enterprises and individuals may make foreign exchange payment using the foreign exchange they own or foreign exchange purchased with RMB. Domestic enterprises may wire their foreign exchange receipts to China or deposit overseas under certain conditions and within a specific time limit. Foreign exchange receipts can be retained or settled with RMB.

Trade Documents Verification

Financial institutions are responsible for verifying trade documents for service transactions with a value of more than US$50,000 to ensure authenticity of the trade documents and consistency between the trade documents and the foreign exchange payment and receipt being made. The Rules lists the trade documents required for each type of transaction under service trade, including contracts, payment notices and any other documents that can prove the legality and authenticity of the transaction. Compared with the current requirements for different types of service trade transactions, the requirements provided by the Rules are much more simple and easy to handle (abolishing more than 50 current rules and regulations from 1 September 2013), particularly where some authority approvals have been removed. For example, for foreign exchange payment under a technology import and export contract, the registration form issued by the local commercial bureau will no longer need to be verified by the financial institutions when making a foreign exchange payment under the technology import and export contract.

For service trade transactions with a value of US$50,000 or less, the financial institutions normally will not have to verify certain trade documents. However, if the financial institution cannot determine nature of the payment or receipt being made, it may ask the enterprise or individual to provide relevant documents for verification.

All trade documents that have been verified by the financial institution shall be kept for five years by the domestic enterprises, individuals and the financial institutions. Trade documents submitted to a financial institution under service trade can either be in the form of hard copy or electronic.

Overseas Deposit of Foreign Exchange Receipts by Domestic Institutions

Domestic enterprises may deposit foreign exchange receipts overseas under certain terms and conditions as specified by the Rules, for example, where there is a continuous need to make foreign exchange payment overseas or there is no violation of foreign exchange regulations by that domestic enterprise for the past two years, etc. Domestic enterprise groups may also be allowed to deposit their foreign exchange receipts overseas in a centralized manner under the Rules by meeting specific conditions.

Domestic enterprises may open a bank account overseas (“Foreign Bank Account”) to deposit their foreign exchange receipts. To open a Foreign Bank Account, domestic enterprises shall submit documents as required to the local counterpart of SAFE at the place of the enterprise for approval. Once the Foreign Bank Account is opened, the domestic enterprise shall report the basic information, any change of it and closing of the Foreign Bank Account to the local counterpart of SAFE within ten days. Once the Foreign Bank Account is closed, the domestic enterprise shall remit back to China the balance of the Foreign Bank Account.

The balance in the Foreign Bank Account must not exceed 50% of the total amount of the enterprise’s foreign exchange receipts for the last year. Relevant trade documents for transactions of which foreign exchange receipts deposited in the Foreign Bank account shall also be kept for five years by the domestic enterprise.

The Proclamation

Under the Proclamation, foreign exchange payment under service trade with value of more than US$50,000, domestic enterprises and individuals shall file with the local state tax bureau in charge and obtain a Tax Record-Filing Form approved by the state tax bureau. This must be submitted to the relevant financial institutions together with other trade documents for verification. The Proclamation lists the circumstances under which such Tax Record-Filing Form shall be obtained, but the list is not exhaustive. According to SAT’s explanation, unless the foreign exchange payment falls within the circumstances stipulated in Article 3 of the Proclamation, such Tax Record-Filing Form shall be obtained.

Before taking effect of the Proclamation, domestic enterprises and individuals need to provide the financial institution with a Tax Certificate issued by the tax bureau, certifying that the withholding tax on the foreign exchange payment being made has been paid.

However, under the Proclamation, the tax bureau will not check if the withholding obligations has been performed or not, and will approve the Tax Record-Filing Form so long as the form has been properly filled out and the required documents (including the contract) have been submitted. No information about withholding tax is mentioned in the Tax Record-Filing Form. The tax bureau will inspect if relevant withholding tax has been paid afterwards.

Conclusion

Issuance of the Rules makes it more simple and convenient for domestic enterprises and individuals to do business under service trade, by cancelling trade documents verification for transactions with value of US$50,000 or less and simplifying the documents required where verification is still needed.