New Rules on Foreign Exchange Administration will make FDI in China more easily
Q: When did the authority promulgate new foreign exchange rules on FDI?
A: The State Administration of Foreign Exchange of the PRC (“SAFE”) promulgated Regulations on the Foreign Exchange Administration of Onshore Direct Investment by Foreign Investors (“Circular 21”) on May 13, 2013, which took effect on the same date.
Q: What is the aim of Circular 21?
A: China formulated Circular 21 with the aim of further simplifying the rules governing foreign direct investment (FDI) and optimizing the procedure of the government's scrutiny to improve the investment environment. Under Circular 21, the rules of foreign exchange administration on FDI become simpler than before, which will simplify dramatically the foreign exchange administration procedures for inbound direct investment.
Q: How does Circular 21 define the term “onshore direct investment”?
A: According to Circular 21, onshore direct investment means the formation of the foreign invested enterprises or projects(“FIEs”) in China by foreign investor through newly establishing or acquisition or merger whereby the foreign investor therefore acquire the ownership, right of control or management rights.
Q: Are FIEs required to carry out registration procedure, other than pre-approval procedure, when making onshore direct investment?
A: Yes. As stipulated in Article 3 of Circular 21, FIE should carry out registration procedure when making onshore direct investment. That means SAFE abolished the pre-approval requirements on many foreign exchange administration matters, which will make FDI more easily.
Q: In what regards Circular 21 require FIEs or foreign investor to do registration procedure?
A: According to Circular 21, FIEs or foreign investor should do registration procedure in the following circumstances: (1)remission of pre-operating expense for establishing FIEs; (2) establishment of FIEs; (3)foreign investors’ contribution of capital in the form of foreign exchange, equity, tangible or intangible assets (including onshore lawful profits), or payment of consideration to a Chinese shareholder when acquiring a domestic enterprise; (3)changes to an FIE such as capital increase, capital reduction, equity transfer; (4)deregistration of an FIE or conversion of an FIE into a non-FIE; and (5)equity transfer, onshore reinvestment and relevant matters related to FDI by onshore and offshore institutions and individuals.
Q: Is a foreign investor allowed to open an account to receive fund for pre-operating expense before establishing a FIE in China?
A: Yes. Under Circular 21, a foreign investor is allowed to open an account to receive fund for pre-operating expense before establishing a FIE in China, provided the foreign investor fulfill the registration procedure.
Q: Should FIEs submit themselves to annual inspection or examination by local SAFE?
A: Yes. According to Article 11 of Circular 21, local SAFE has right to conduct annual examination or insepectin on FIEs, and are entitled to conduct on-site or off-site inspections if they believe there are abnormal or suspicious activities with FIEs.
Q: Does Circular govern foreign investor setting up a financial institution in China?
A: Yes. Circular 21 should be applied to scenario where a foreign investor set up a financial institution in China.
Q: Does Circular 21 govern the investors from Hong Kong, Macao or Taiwan?
A: Yes. The onshore direct investment by investors from the Hong Kong Special Administrative Region, the Macao Special Administrative Region and Taiwan of enterprises elsewhere in China should be handled in accordance Circular 21.