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Control over Foreign Exchange of Foreign-invested Enterprises

Registration of Foreign-invested Enterprises

(a)  Documentation Required for Registration

After obtaining an Enterprise Legal Person Business Licence, an FIE should apply to the foreign exchange authorities at the place of its business registration for registration of basic information and obtain documents necessary for further business. In applying for registration, the following documents should be presented: Domestic Direct Investment Basic Information Registration Form, approval documents and approval certificate of establishment of FIE (photocopies) issued by the examination and approval organs; Enterprise Legal Person Business Licence issued by the State Administration for Industry and Commerce and copy, and the organisation code certificate. Under the Circular of the State Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment (Hui Fa [2012] No.59), enterprises in which foreign-funded investment companies reinvest are not required to complete basic information registration procedures. As for FIEs jointly established by foreign-funded investment companies and foreign investors, the enterprise invested in is required to complete basic information registration procedures. The basic information of the foreign-funded investment company will be entered into the registration form under Chinese partner.

(b)  Alteration and Cancellation of FIE Basic Information Registration

Should there be any change in the name, address, business scope, or any assignment, capital increase or merger of an FIE subsequent to the registration of its basic information, the FIE should submit the relevant documents promptly to the foreign exchange authorities for record filing and alteration of the necessary information.

Upon expiry of its operation period or termination of business, an FIE should, with the approval of the original examination and approval organ, complete basic information registration cancellation procedures with the foreign exchange authorities. 
For FIEs which have completed foreign exchange registration at the place of business registration, their branch operations elsewhere in the mainland or outside China are not required to go through foreign exchange registration separately.

(c)  Registration of Special Types of FIEs

Foreign investors acquiring the equities of mainland enterprises should, at the time of making payment for the equities, complete the registration procedures for confirming their capital contribution in acquiring the equities of the Chinese party.

When a mainland resident makes round-tripping investment through an offshore special purpose vehicle, the domestic enterprise can only go through FIE foreign exchange registration formalities after the mainland resident has completed the required formalities for foreign exchange registration or alteration for overseas investment.

Control Over the Current Account of Foreign-invested Enterprises

(a)  Foreign Exchange Receipts under the Current Account

An FIE can open a foreign exchange settlement account directly with a designated bank by presenting its Foreign Exchange Registration Certificate and other supporting documents and can retain or sell the foreign exchange to a financial institution engaged in the settlement and sale of foreign exchange according to relevant state regulations. It is no longer required to repatriate its foreign exchange receipts and allowed to either repatriate its foreign exchange receipts or have them deposited abroad in accordance with the prescribed conditions and terms.

(b)  Foreign Exchange Payments under the Current Account

When an FIE has to make external payments within its business scope, it may withdraw the required amount from its foreign exchange settlement account and any shortage can be made up for by purchasing foreign exchange with renminbi at designated banks. Details are as follows: (1) remittance of after-tax profits and bonuses to the foreign party of an FIE can be made from the foreign exchange account or at designated banks by presenting the board of directors’ profit distribution resolution; (2) the after-tax wages and other legitimate incomes in renminbi of an FIE’s foreign, overseas Chinese, Hong Kong, Macau and Taiwanese employees may be converted into foreign currency and remitted at designated banks upon presentation of relevant supporting documents; (3) after-tax dividends payable in foreign exchange may be remitted from the foreign exchange account or at designated banks.

Enterprises making advance payment for imports to their head office (or parent company) located outside the mainland, or to the subsidiaries or companies invested by or controlled by their offshore head office (or parent company) in a foreign country or region (including Hong Kong, Macau and Taiwan) are not required to submit a letter of guarantee for the advance payment. The FIE can directly complete the foreign exchange purchase and payment procedures at a designated bank by presenting the relevant proofs such as import contract and proforma invoice.

Before settling the first foreign exchange receipt or payment in trade in goods, the FIE should go to the foreign exchange authorities to complete procedures for registration in the directory by presenting the necessary documents.

Control Over the Capital Account of Foreign-invested Enterprises

(a)  Management of Receipts under the Capital Account

Receipts under the capital account

  • Capital fund in foreign exchange contributed by foreign investor to an FIE;

  • External debts, external debts-turned-loans, and foreign exchange loans extended by domestic financial institutions in the mainland to an FIE;

  • Foreign exchange revenues derived from an FIE’s share issue and other foreign exchange receipts under the capital account.

Management of capital fund

  • The foreign investor may remit equity capital to an FIE from his foreign exchange bank account opened in the mainland as a non-resident individual, or from his offshore account with a designated bank authorised by PBOC to conduct offshore business.

  • Apart from freely convertible currencies, imported equipment and materials, intangible assets and profits in renminbi, other forms of capital contribution to an FIE are also acceptable upon foreign exchange authorities approval. These include the development fund and reserve fund (or capital provident fund and surplus provident fund) of the FIE as increased capital of the enterprise; the profit prior to distribution, payable dividend and payable interest thereof as increased capital of the enterprise; the principal of a registered external debt and current interest thereof of the foreign party as increased capital of the enterprise; and the capital contributed to the FIE by a foreign investor in an existing FIE with recovered investment, proceeds from liquidation, share transfer and reduced investment.

  • In cases where the aggregate remittance amount of front-end expenses for outward direct investment does not exceed US$3 million and does not exceed 15% of the total investment of the Chinese party, the domestic organisation can complete front-end expenses registration procedures at the local foreign exchange authorities by presenting its business licence and organisation code certificate. In cases where the aggregate remittance amount of front-end expenses exceeds US$3 million or exceeds 15% of the total investment of the Chinese party, in addition to presenting its business licence and organisation code certificate to the local foreign exchange authorities, the domestic organisation should also furnish its written application submitted to the offshore direct investment supervisory department as well as relevant documents (including letter of intent, memorandum of understanding or framework agreement signed by the Chinese and foreign parties) proving its participation in tendering, merger and acquisition or equity/contractual joint venture projects. The FIE can open a foreign exchange capital fund account for the capital fund in foreign exchange contributed by the foreign party and can apply to the bank for foreign exchange settlements or direct payments in foreign exchange within the scope of receipts and payments of their capital account.

  • The settlement of the capital fund of a foreign investment project is directly examined and handled by designated foreign exchange banks authorised by foreign exchange authorities. In other words, based on certain criteria, foreign exchange authorities delegate the approval power over the settlement of the capital fund of foreign investment projects to qualified banks. Such banks are charged with the responsibilities of examining, monitoring and recording all settlement activities. Foreign exchange authorities indirectly monitor the settlement of capital fund of foreign investment projects through these banks.

  • The foreign exchange in the capital fund account may be drawn to pay for the FIE’s foreign exchange payments under the current account. With foreign exchange authorities approval, it can also be used for foreign exchange payments under the capital account.

Management of financial credit

  • For FIEs seeking international commercial loans, prior approval is not required. However, the sum of accumulated medium- to long-term external debts and the balance of short-term external debts must not exceed the difference between the total investment of the project approved and the registered capital of the FIE. The FIE can raise external debts so long as the amount is within the said difference. Should the amount exceed the difference, a new approval of the total investment of the project has to be sought from the original approval authority.

  • After signing an external loan agreement, the FIE should promptly register with foreign exchange authorities the external debt on a periodic or per case basis before it can use the foreign exchange obtained. It should also report to foreign exchange authorities upon actual utilisation of the foreign exchange. With approval from foreign exchange departments, the borrower can repay external debts with its own foreign exchange or purchase foreign exchange with renminbi to make repayment. The external debts in foreign exchange borrowed by FIEs can be settled for use. Unless otherwise specified, the external debts in foreign exchange borrowed by domestic financial institutions and Chinese-funded enterprises may not be settled for use. On principle, short-term external debts can only be used as circulating capital and may not be put to medium to long-term use such as fixed asset investment.

  • Enterprises borrowing external debts and external debts-turned-loans can open an external debt account and an external debt-turned-loan account. The foreign exchange funds deposited into the external debt account can only be the external debt registered. The requirement for registration of external debts-turned-loans (referred to as debt-turned-loan below) case-by-case and examination and approval of exchange conversion has been lifted and replaced by central registration of debt-turned-loan creditors. Approval for the opening of debt-turned-loan accounts has also been revoked. Debt-turned-loan creditors can open an account with the bank directly by submitting an account opening application and presenting their debt-turned-loan agreement. Debt-turned-loan creditors or debt-turned-loan debtors are allowed to go directly to their account-opening bank to complete internal fund transfer formalities by presenting such documents as their debt-turned-loan agreement. Approval for exchange settlement of policy debts-turned-loans has been revoked. Debt-turned-loan creditors obtaining foreign exchange funds from policy debts-turned-loans can go directly to their account-opening bank to complete foreign exchange settlement procedures by presenting their debt-turned-loan agreement and exchange settlement application. However, exchange settlement is not allowed for foreign exchange funds obtained by debt-turned-loan creditors from commercial debts-turned-loans. Approval for principal and interest repayment and foreign exchange purchase under the debt-turned-loan account is no longer required. Debt-turned-loan creditors can go directly to the bank to complete repayment procedures by presenting their debt-turned-loan agreement and repayment notice. Provided that agreement is reached voluntarily, the creditor or debtor of debts-turned-loans (ultimate debtors excluded) can go directly to the bank on behalf of subordinate debtors to complete exchange settlement and exchange purchase formalities by presenting the relevant documents.

  • Management of offshore guarantee under the onshore loan account is subject to regulation. Offshore guarantee under the onshore loan account will now come under external debt control and the guarantee amount will be set according to the execution amount instead of the contract amount. In cases where an onshore debtor incurs an external debt due to an offshore guarantee of contract performance under the onshore loan account, the principal balance may not exceed its unaudited net asset value of the preceding year.

  • Funds transferred to multinational companies registered in the mainland from their offshore associated companies for centralised use are subject to external debt management.

Management of trade credit

  • Advance receipts (or advance payments). Starting from 1 August 2012, FIEs that receive advance receipts (or make advance payments) from overseas in trade in goods with a term of over 30 days (the date of foreign exchange receipt is 30 days before the export date, or the date of foreign exchange payment is 30 days before the import date) must, in accordance with the relevant regulations, file a report on advance receipt (or advance payment) on SAFE’s online service platform – the Foreign Exchange Monitoring System for Trade in Goods.

  • Deferred payments (or deferred receipts). Starting from 1 August 2012, FIEs that make deferred payment for imports (or receive deferred receipt for exports) in trade in goods with a term of over 90 days (import date is 90 days before the date of foreign exchange payment or export date is 90 days before the date of foreign exchange receipt) must, in accordance with the relevant regulations, file a report on deferred payment (or deferred receipt) on SAFE’s online service platform – the Foreign Exchange Monitoring System for Trade in Goods.

  • In the case of Category B and C enterprises, for all advance receipts (or advance payments) and deferred payments (or deferred receipts) with a term of over 30 days, they must, in accordance with the relevant regulations, file a report on SAFE’s online service platform – the Foreign Exchange Monitoring System for Trade in Goods.

Foreign exchange receipts from share issuance

  • FIEs deriving foreign exchange incomes from issuing shares should open a special offshore foreign exchange account. Deposits into this account will be proceeds derived from share issues and listings offshore and from overseas deposits, while payments will be for the repatriation of funds, the payment of fees involved in overseas listings, and purposes stipulated in the share prospectus. The duration of this account is two years.

  • Funds raised by domestic companies from offshore listing may be repatriated and deposited into their special account in the mainland or into their special account offshore. Such funds must be used for purposes as specified in the share prospectus or in publicly disclosed documents such as corporate bonds issue prospectus, circulars to shareholders, and resolutions of shareholders’ general meetings. Funds raised by way of issuing convertible bonds offshore and repatriated for use in the mainland should be deposited into their special external debt account and used in compliance with regulations on external debt management. Funds raised by way of issuing other types of securities offshore and repatriated should be deposited into their special offshore listing account in the mainland.

  • Foreign-invested joint-stock companies with offshore listing and organisations holding the domestic shares of mainland-controlled companies with offshore listing should complete the foreign exchange registration procedure for offshore listing and share issuance at foreign exchange authorities after CSRC has approved the offshore share issuance and listing (including share placements).

  • Repatriation of funds raised by foreign-invested joint-stock companies with offshore listing and organisations holding the domestic shares of mainland-controlled companies with offshore listing should be made within six months after the funds have been raised. In principle a special domestic share account should be opened for the repatriation of funds raised through offshore listing. Deposits into this account will be foreign exchange funds raised through offshore listing, while payments from this account will be foreign exchange expenses under the current account as stipulated in the prospectus, settlements approved by foreign exchange authorities, foreign exchange outlays under the capital account, and offshore applications as stipulated in the prospectus.

  • In cases where major changes (such as changes in the ratio of increased shares or reduced shares, price, holding period, progress etc) occur in the arrangements of the offshore shares of a domestic company, the mainland shareholders should, within 15 working days, go to the local foreign exchange authorities to complete procedures for registration of changes by presenting their written application, original offshore shareholding registration certificate, latest completed Offshore Shareholding Registration Form, and authentic documentary proofs of the relevant transactions.

  • Foreign-invested joint-stock companies with offshore listing and organisations holding the domestic shares of mainland-controlled companies with offshore listing should report to local foreign exchange authorities on a quarterly basis the position of their special offshore foreign exchange accounts.

  • In repatriating foreign exchange derived from reducing the shares held in listed companies or selling off their assets (equities) through a listed company, foreign-invested joint-stock companies with offshore listing and organisations holding the domestic shares of mainland-controlled companies with offshore listing may apply to local foreign exchange authorities for opening a special account (or using an existing special account) to keep the foreign exchange. Such foreign exchange may not be used for settlement without the approval of the local foreign exchange authorities.

  • Domestic companies exiting from the offshore securities market should, within 15 working days after the exit, go to the local foreign exchange authorities to complete procedures for cancellation of registration of offshore listing by presenting such authentic documentary proofs as photocopies of the relevant comments made by the supervisory department, market exit notice, as well as statements about the disposal of the relevant accounts and funds.

(b)  Management of Payments under the Capital Account

In accordance with the Regulations for Foreign Exchange Control of the People’s Republic of China, foreign exchange payments under the capital account that do not require prior approval by SAFE may, in principle, be processed directly at financial institutions upon presentation of the valid documents required. If approval by SAFE is required, the necessary approval procedures must be completed before payments can be made.

  • Payments from the capital account

    • Repayment of loan principal, and provision of   external guarantee in relation to contract compliance;

    • Remittance of capital from the transfer of shares by the foreign party to an FIE;

    • Remittance of capital from capital reduction by the foreign shareholders of an FIE;

    • Remittance of capital upon liquidation of an FIE in accordance with relevant regulations;

    • Increased investment or reinvestment within the mainland by the foreign party to an FIE with profits received;

    • Increased investment within the mainland by investment companies with foreign exchange capital;

    • Remittance of offshore lending capital.

  • Repayment of loans: Repayment of external debt principal and interest can be made directly at the bank. For repayment of foreign exchange loan principal, interest and related fees to domestic financial institutions in the mainland, the FIE may proceed to the financial institution where it has an account with to complete the necessary procedures by presenting the required documents such as the notice by creditor on repayment of principal and interest, and loan agreement.

  • Offshore investment: For investment abroad, the source of funds does not have to be examined by foreign exchange authorities before an application is filed with the competent approval authority. After registering with foreign exchange authorities for direct offshore investment, an FIE may go to a designated foreign exchange bank to go through remittance formalities in accordance with relevant regulations. Approval by foreign exchange authorities is still required for remittance of front-end expenses. Domestic organisations which have not been granted approval or filing by the offshore direct investment supervisory department within six months as from the day the front-end expenses were remitted out of the country, should report to the local foreign exchange authorities on the use of the front-end expenses and return the unused funds. Should there be valid reasons for delay, the domestic organisation can apply to the local foreign exchange authorities for an extension, which may not exceed 12 months.

  • Restrictions on lending offshore by domestic enterprises have been relaxed. Domestic enterprises are permitted to extend loans to offshore enterprises which have association relationship with them. The domestic enterprise should go to the local foreign exchange authorities to complete formalities of offshore lending amount registration by presenting its offshore loan agreement and latest financial audit report. The aggregate offshore lending amount of a domestic enterprise may not exceed 30% of the equities of its owners. A domestic enterprise may apply to foreign exchange authorities with relevant documents for financing in the form of direct lending to its wholly-owned subsidiary or an enterprise in which it holds shares legally established abroad within the approved limit and according to the amount, interest rate and term agreed upon in the contract. However, it must open a special offshore lending account at the designated foreign exchange bank and make relevant transfers through this account. The foreign exchange authorities have lifted the rule restricting the term of offshore lending to two years. Domestic enterprises can now apply to the local foreign exchange authorities for their term of offshore lending according to their actual business needs.

  • When an FIE is liquidated and after all taxes have been paid in accordance with the relevant regulations, the amount that goes to the foreign party may be remitted through designated banks or carried in person out of the country. However, foreign exchange that goes to the Chinese party should be sold to designated banks in full.

  • The foreign party to an FIE wishing to remit its legitimate share of renminbi profits out of China may complete the remittance procedure at the bank (by drawing from its own foreign exchange account or by purchasing the required foreign exchange) by presenting the necessary documents. Alternatively, upon SAFE approval, it can reinvest its renminbi profits in China and enjoy the treatment of foreign exchange investment.

  • Should the foreign party to an FIE wish to increase its investment in China, it has to apply to the local SAFE branch by submitting the relevant approval documents from the competent departments and other materials.

(c)  Fund Transfer

  • Transfer of foreign exchange is prohibited between a non-investment FIE and the companies it invests in, as well as among the different companies invested by the non-investment FIE. Should special circumstances warrant such transfer, SAFE approval must be sought.

  • With the exception of investment FIEs, no FIE may make equity investment within the territory of China.

Foreign Exchange Accounts of Foreign-invested Enterprises

FIEs can open a foreign exchange settlement account for foreign exchange receipts under the current account, and open special accounts such as equity capital account, loan account and loan repayment account, for foreign exchange receipts under the capital account.

(a)  Account under the current account (foreign exchange settlement account)

  • Domestic institutions do not need to seek prior approval from foreign exchange authorities to open, alter or change foreign exchange accounts under the current account. If a domestic institution that has already opened a foreign exchange account under the current account needs to open a new current foreign exchange account, it may directly handle the account opening formalities at a designated foreign exchange bank by submitting the accounting opening application form, its business licence (or registration certificate for social organisations) and its organisation code certificate. Any domestic organisation which has not opened a foreign exchange account under the current account should register its basic information directly with the bank and may also register its basic information with the foreign exchange authorities at the location where it has its bank account opened by presenting its business licence (or registration certificate of social organisations) and organisation code certificate. The retention ceiling under the current account has been abolished.

  • An enterprise may retain its foreign exchange receipts under the current account for its own operational needs.

  • External payments under the current account can be made from the balance of the foreign exchange settlement account by presenting the necessary documents to the bank. External payments under the capital account must be verified and approved by foreign exchange authorities prior to payment.

(b)  Foreign exchange account under the capital account

The Regulations for the Administration of Foreign Exchange Accounts in China set out clear provisions governing the opening and use of special accounts under the capital account.

  • Foreign exchange accounts under the capital account

    • A capital fund account can be opened for capital contributions in the form of foreign exchange by domestic and foreign parties;

    • A loan account can be opened for external debts, external debts-turned-loans, and foreign exchange loans from domestic financial institutions;

    • A loan repayment account can be opened for foreign exchange for repaying the principal of domestic and offshore foreign exchange debts;

    • A securities account and other special accounts can be opened for foreign exchange deriving from share issue and other capital account items.

  • Scope of use of foreign exchange accounts under the capital account

    • Capital fund account: Receipts are capital contributions in the form of foreign exchange by domestic and foreign investors; payments are foreign exchange payments under the current account and foreign exchange payments under the capital account approved by foreign exchange authorities.

    • Loan account: Receipts are funds from registered external debts, while payments are current account payments stipulated in the loan contracts and capital account payments approved by foreign exchange authorities. Approval by foreign exchange authorities is required for foreign exchange settlements.

    • Loan repayment account: Receipts are approved purchases of foreign exchange with renminbi, funds transferred from approved loan accounts, and foreign exchange receipts approved for retention; payments are for repayment of principal and interest of debts and other related expenses. The balance in the loan repayment account must not exceed the total amount of the last two instalment repayments of principal and interest, and each payment must be reported to foreign exchange authorities for approval.

    • Offshore securities account: Receipts are funds raised through offshore share issuance and listing and proceeds from funds deposited offshore, while payments are for repatriation of funds, offshore listing expenses and uses specified in the prospectus.

    • Domestic securities accounts: Receipts cover foreign exchange funds raised offshore, while payments cover foreign exchange payments under the current account stipulated in the prospectus, foreign exchange settlements approved by foreign exchange authorities, foreign exchange payments under the capital account, and overseas uses stipulated in the prospectus.

Content provided by Picture: HKTDC Research
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