CBL Team’s Introduction

CBL’s translation of a FAQ by the Chinese government administration answers questions about how funding and capital contributions should be handled under the 2019 Foreign Investment Law. In addition to foreign exchange questions, it provides useful answers about repatriation of profits. This guidance is translated to American English using the User Centered Translation approach.

Official FAQ on Financing FDI

Q: The Ministry of Commerce will not issue certificates of approval or filing receipts for foreign owned entities once the PRC Foreign Investment Act and the PRC Foreign Investment Act Administrative Regulations come into force. So, what documents should a foreign owned entity submit during foreign currency exchange registration?
A: Businesses will need to submit Business Licenses issued by the market regulatory agency, approval notices (except for those legally exempt from providing such), and Foreign Direct Investment Business Registration Form to their banks during the foreign exchange registration process. Unless otherwise provided by law, foreign direct investment approvals or filing documents issued by the Ministry of Commerce are not required. Banks may verify information submitted during foreign currency exchange registration by looking it up on the National Business Credit Lookup System or by reviewing the submitted Articles of Incorporation or Partnership Agreement whenever more information than that provided by the market regulator is necessary to complete foreign currency exchange registration.
Q: Foreign exchange registration information needs to be revised whenever foreign shareholders assign their equity to a domestic entity. However, original copies of the tax receipts issued by the jurisdictional tax office cannot be provided since local tax office uses an electronic filing system. How can this be resolved?
A: To facilitate business filings, tax filing receipts are not required for foreign exchange registration when foreign entities assign equity in a foreign owned entity to a domestic entity. Banks can verify electronic tax receipts via the local tax office’s electronic tax system whenever a domestic entity or individual makes a request to transfer funds for the equity assignment overseas if the original tax filing was completed electronically.
Q: How should we prepare the annual financial data filings required for business entities that have foreign investors?
A: Annual financial data filings for business entities with foreign investors has been included in the “consolidated” annual form required by the market regulation agency, and reports from capital management systems are no longer required. Business entities with foreign investors formed and registered pursuant to Chinese law before December 31, 2019 are required to submit their annual financial statements via the National Business Credit Lookup System (www.gsxt.gov.cn) between January 1, 2020 and June 30, 2020 in compliance with the Notice of Reform on “Consolidated” Annual Form Issued by the National Administration for Market Regulation, the Ministry of Commerce, and State Administration of Foreign Exchange (Notice 238 of the National Administration for Market Regulation in 2019) and the Notice regarding Submitting Annual Form of Foreign Investment in 2019 Issued by the Ministry of Commerce, the State Administration for Market Regulation, and National Administration of Foreign Exchange (Notice 72 of the Ministry of Commerce in 2019). The data will be shared with the Ministry of Commerce, the National Administration for Market Regulation, and the National Administration of Foreign Exchange.
Q: Certain foreign owned entities are required to pay in their authorized capital within a specific time frame and need to transfer funds before receiving their business license. How can these entities complete such transfers and foreign exchange registration?
A: Entities with foreign investors who are required to pay in registered capital within a given time (most of them are financial institutions and similar entities) may register their pre-establishment phase costs and open a pre-establishment phase cost account to receive the funds. They can complete the registration of formation, merger and acquisition, and capital increase based on the certificate of approval issued by the jurisdictional agency and the business license.
Q: Is foreign currency exchange registration required for domestic satellite offices set up by international organizations?
A: When a foreign entity establishes or creates an organization or project not organized as a separate legal entity, they must complete information registration and amendment procedures pursuant to the regulations applicable to business entities with foreign investors (excluding representative offices formed by international entities).
Q: How can any funds remaining after the liquidation of a foreign owned entity be transferred overseas?
A: Entities with foreign investors that are wound up due to bankruptcy, dissolution, expiration of the business term, merger, or spin-off must record the wind-up with their bank and provide the bank with a copy of the liquidation notice after the expiration of the liquidation notice period and termination of tax registration and before the business license is canceled. The entities may then transfer any remaining funds overseas through the bank after submitting documents such as the Business Filings Certification after recording the wind-up.
Q: Can foreign owned entities directly distribute all their net profit for the current year among their foreign shareholders?
A: Distributable profit is calculated as the net profit for the current year plus undistributed profits for previous years (or minus previous annual losses not yet recovered) and other balances transferred in. During their review, banks should note whether any losses were registered for the previous year, and, if so, whether the losses were recovered and recorded in the financial statements.
Q: Can foreign owned entities whose permitted business activities do not directly include “investment” use their capital to make equity investments in China?
A: Yes. Businesses with foreign investors (i.e., non-investment businesses with foreign investors) whose permitted business activities do not directly include “investment” are allowed to make such investments, provided that doing such does not violate foreign investment access administrative regulations (i.e., the Exceptions List) and that the investment project in China is substantial and complies with the law. Foreign owned entities must complete domestic reinvestment registration and open a foreign currency account to receive the funds, and no capital contribution registration is necessary if the domestic equity investment is made by transferring foreign currency registered capital from a business with foreign investors. Foreign owned entities are still required to complete domestic reinvestment registration and open a capital account to receive the funds if the domestic equity investment is made by a business with foreign investors using exchanged foreign currency registered capital.
Q: Can we freely exchange the foreign currency in the pre-establishment phase costs account?
A: Foreign investors may only exchange foreign currency in their pre-establishment phase costs account for valid business transactions but are not required to submit a capital contribution registration form.
Q: How can China residents receive payments for equity assignments paid in foreign currency by domestic entities?
A: China residents are not required to open a capital account or foreign currency capital account to receive funds to be used as payments for equity assignments. The assignee may exchange the foreign currency or use the capital to pay for the equity assignment directly.
Q: Can we use funds in security deposit accounts for pledge loans?
A: Funds in security deposit accounts can only be used to guarantee transactions and cannot be used for pledge loans.
Q: How can we use interest and investment income paid into the foreign exchange account opened for foreign direct investment?
A: The interest and the investment income can be reserved in the account. Additionally, these funds can be reserved in the capital account and transferred to a current account based on a list of interest and investment income, or can be settled and disbursed at the bank.