China Relaxes Control of Capital Account Settlement for FIEs
On 8 April 2015, the State Administration of Foreign Exchange (“SAFE”) issued the Circular of SAFE on the Reform of the Administration Method of Foreign Exchange Registered Capital Settlement for Foreign-Invested Enterprises [Huifa (2015) No.19] (“Circular 19”), which has since come into effect nationwide on 1 June 2015. Circular 19 has expanded the scope of the Circular of SAFE on Relevant Issues Concerning the Reform Pilot of the Administration Method of Foreign Exchange Registered Capital Settlement for Foreign-Invested Enterprises in Certain Area [Huifa (2014) No. 36] (“Circular 36”), which was issued on 15 July 2014.
For many years, the conversion of foreign exchange in the capital accounts of foreign-invested enterprises (FIEs) has been under foreign exchange control, and the converted Reminni (“RMB”) in such capital accounts was prohibited from being used for on-shore equity investments.
The introduction of Circular 36 resulted in a relaxation on the restrictions on capital account settlement for FIEs in certain pilot areas. With the newly issued Circular 19, FIEs now enjoy more flexibility in the conversion and use of their foreign exchange capital.
The main reforms of Circular 19 are discussed below.
Conversion-at-will of funds in capital accounts
Under Circular 19, FIEs will be able to convert foreign exchange in their capital accounts into RMB at any time in accordance with their business needs. FIEs will be allowed to convert up to 100 percent of the foreign exchange in their capital accounts, subject to any further adjustment by SAFE.
The usage of RMB converted from foreign exchange capital nonetheless remains restricted. Pursuant to Circular 19, FIEs are specifically prohibited directly or indirectly from using converted RMB funds for:
- business outside the scope of business or prohibited by laws and regulations, unless otherwise permitted by the laws or securities investments;
- extending trust loans, repaying loans owed to another enterprise and repaying RMB loans relented to third party; and
- purchasing real estate, save for purchasing for self-usage and engaging in property development business.
|
Utilization of converted RMB funds for on-shore equity investment
Under Circular 19, FIEs will be allowed to use converted RMB from capital accounts for equity investments in China, which is likely to facilitate the ability of FIEs to conduct equity investment in China more directly, rather than using an offshore investment vehicle. Therefore, the reforms proposed under Circular 19 represent a significant change as multinational corporations now have the choice of restructuring equity investments through their China FIEs.
Conclusion
Circular 19 represents a significant reform in the current regulations of foreign exchange control on FIEs. However, this is still subject to change during the course of enforcement, and we will keep you updated on further developments.
This article is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this article are those of the author and do not necessarily reflect the views of the author’s law firm or its individual partners.
Article written by Leon Yee |
