The State Administration of Foreign Exchange has issued a series of policies on foreign direct investment (“FDI”) in order to optimize the procedure of the government’s scrutiny to improve the investment environment. More specifically on May 10, 2013, the 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 (
).
China’s foreign direct investment topped $116 billion in 2012. This is a record, according to the Commerce Ministry, which aims to attract an average of $120 billion in each year from 2013 to 2015. In order to maintain and possibly attract more foreign direct investments, the Chinese legislator is trying to reduce bureaucracy and render the investment environment more attractive to foreign investors.
The Regulation mentioned above is the latest move to encourage foreign direct investments into China
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 new Regulations establish that the principal administrative model for FDI is foreign exchange registration. The Administrative Rules clarify the matters under FDI that need to be registered with SAFE, which include the following:
– Remittance of up-front fees and related funds by foreign investors;
– Newly-established foreign-invested enterprises;
– Capital contribution by foreign investors to foreign-invested enterprises, or payment of the purchase price by foreign investors for the acquisition of the shares of domestic companies;
– Capital increase, capital decrease, transfer of shares, other capital changes, and deregistration of foreign-invested enterprises;
– Deregistration of FIEs or transformation of FIEs to non-FIEs;
– Transfer of shares, domestic reinvestment and related businesses involved in domestic direct investment by domestic and foreign institutions and individuals.
– Remittance of funds abroad due to capital decrease, liquidation, recovery of investment in advance, or transfer of equities held by foreign investors in FIEs.
Further Clarify Foreign Exchange Matters Conducted by Banks
In 2012, Circular 59 repealed the approval for foreign exchange account opening, account entry, purchase and payment of foreign exchange under FDI, and the prior filing procedures for the special settlement of foreign exchange capital funds of foreign-invested enterprises. Currently, the Administrative Rules reemphasize that banks will be responsible for the opening of up-front fees account, capital accounts and assets realization accounts and other FDI accounts, as well as the settlement of capital funds of foreign-invested enterprises. In addition, where foreign-invested enterprises need to remit money abroad due to capital decrease, liquidation, withdrawal of investment, distribution of profits, etc., they may purchase foreign exchange and make outbound payments in banks after completing the relevant registration with SAFE. Where outbound remittance is needed due to the acquisition of the shares of foreign investors, the domestic transferee may purchase foreign exchange and make outbound payments in banks after the foreign-invested enterprise has completed the relevant registration with SAFE.
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
Strengthen Statistical Supervision on Fund Flows under FDI
Pursuant to the new Regulations, banks shall conduct relevant businesses according to the registered information of SAFE, open accounts for entities, and submit information of account opening, account change, receipt and payment of funds, and settlement and sales of foreign exchange to SAFE in accordance with the relevant rules and regulations. SAFE shall conduct statistical supervision on cross-border fund payments, settlements and sales of foreign exchange, changes in rights and interests of foreign investors under FDI through registration, bank reports, annual inspections on foreign-invested enterprises, sample surveys, etc. in accordance with the relevant rules and regulations.
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. 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 will surely facilitate the operation of FIEs regarding the foreign exchange matters and attract more foreign investment entering into China market,
Cristiano Rizzi