China Simplifies Rules on Foreign Exchange Administration of Foreign Direct Investment

On May 10, 2013, State Administration of Foreign Exchange (“SAFE”) released the “Regulations on the Foreign Exchange Administration of Domestic Foreign Direct Investment” (hereinafter the “Regulations”), which came into effect on May 13, 2013.

The promulgation of the Regulations aim to further simplify and clarify the foreign exchange administration of foreign direct investment (“FDI”) into China, following the Notice on Further Improvement and Revision of Foreign Exchange Regulatory Policies concerning Foreign Direct Investment (the “Notice”) issued by SAFE on November 19, 2012, which simplified dramatically procedures and examination concerning the foreign exchange administration for FDI (see previous post http://www.ub-co.com/media-room/news/76/2012-11-19/notice-on-further-improvement-and-revision-of-foreign-exchange-regulatory-policies-concerning-foreign-direct-investment/).

According to the Regulations, SAFE has simplified the foreign exchange administration procedures with respect to the registration, account openings and conversions, settlements of FDI-related foreign exchange, as well as fund remittances.

The main issues of the Regulations are as follows:

1. Definition of “Domestic FDI”

According to Article 2 of the Regulations, “domestic FDI” refers to the establishment of foreign-invested enterprises (FIEs) or projects in China by means of new setup, mergers and acquisitions, or other methods, through which foreign investors acquire the ownership, control rights, or operation and management rights, or other rights and interests.

2. Authorities in Charge

SAFE and its branches are in charge of foreign exchange administration registration and supervision.

3. Foreign Exchange Registration

The following FDI-related activities require the registration with SAFE and its branches.

• Remittance of pre-operation expenses for establishing FIEs;
• Establishment of FIEs;
• Foreign investors’ capital contribution to FIEs in the form of foreign exchange, equity, tangible and intangible assets (including domestic lawful profits), as well as payment of consideration to the Chinese shareholder when acquiring its equities in a domestic enterprise;
• Changes of FIEs such as capital increase, capital decrease, equity transfer;
• Deregistration of FIEs or transformation of FIEs to non-FIEs;
• FDI-related activities conducted by domestic and foreign institutions and individuals, such as equity transfer, domestic re-investment;
• Remittance of funds abroad due to capital decrease, liquidation, recovery of investment in advance, or transfer of equities held by foreign investors in FIEs.

4. Form of Bank Accounts for FDI

After the registration, FIEs may open one or more bank accounts as follows according to the actual requirements:

• Pre-operation expenses account;
• Capital account;
• Asset conversion account

5. Annual Inspection

SAFE and its branches conduct the annual inspection of FIEs based on relevant regulations, and are entitled to conduct on-site or off-site inspections where they discover abnormal or suspicious activities of FIEs.

6. Supervision and Management

The supervision and management of SAFE and its branches applies to both FDI-related activities conducted by foreign investors/FIEs and banking services provided by corresponding banks.

On one hand, activities such as investment fund remittance, settlements, use of FIEs’ capital after settlements, changes of foreign investors’ rights and interests, opening and changes of FIEs’ bank accounts, shall be supervised by SAFE and its branches.

On the other hand, corresponding banks are required to register or report service information regarding the opening of and changes of accounts, fund remittances, and foreign exchange settlements relating to FDI with SAFE and its branches.

7. Others

The Regulations also apply to the establishment of financial institutions in China, and cover investors from Hong Kong, Macau, and Taiwan.

In addition, the Regulations abolish 24 foreign exchange administrative regulations that are out of date or no longer applicable.

Comments

The trend of improvement and reform of foreign exchange administration of FDI indicates that the new leadership of the Chinese government follows policies of the previous government in order to further simplify the foreign exchange administrative procedure and loosen the strict control in this regard.

The Regulations together with the Notices will surely facilitate the operation of FIEs regarding the foreign exchange matters and attract more foreign investment entering into China market, which will probably help to reverse the persistent weakening of the Chinese economic since early 2012.

by UBILLA & CIA