NEW FOREIGN EXCHANGE RULES FOR FIES
Mar. to Jun. 2015 China Bulletin
TOPICS: 1) Foreign Exchange Registration for foreign-invested enterprises (FIEs), 2) Paid-In Capital Registration, 3) Converting Funds, 4) Annual Foreign Exchange Inspection
FOREIGN EXCHANGE REGISTRATION
According to the Notice of SAFE on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment (huifa No. 13) (Notice 13), adopted from June 1, foreign invested enterprises (FIEs) in China may now directly apply to local banks for foreign exchange registration (including change of registration), without having to apply through the State Administration for Industry and Commerce (SAFE). A local bank, after reviewing the documents an FIE submits, will complete the registration through the online Capital Account Information System managed by SAFE.
PAID-IN CAPITAL REGISTRATION
The paid-in capital registration process has changed, and registration can now be handled without having to submit documents directly to SAFE. This means it is no longer required to have a capital verification report prepared by an authorized certified public accountant (CPA) as evidence that a paid-in capital remittance has been received. Prior to this change, the Administration for Industry and Commerce (AIC) and Ministry of Foreign Trade or local Investment Commission (MOFCOM) had already eliminated the requirement to provide a capital verification report, but some local SAFE branches still insisted on receiving and reviewing such report. Now that the organization directly handling paid-in capital registration has been changed from SAFE to the local banks, it should be clear that capital verification reports will no longer be necessary.
NEW OPTION FOR FOREIGN EXCHANGE CAPITAL SETTLEMENT
SAFE also issued the Notice on Reform of Administration of the Conversation of Foreign Equity Capital of Foreign Invested Enterprises (huifa  No. 19) (Notice 19), adopted from June 1, 2015, which directly affects how FIEs convert capital funds from foreign currency to RMB.
The general rules for conversion of foreign currency, such as USD, remitted to an FIE’s capital account as registered capital are: 1) capital held in, e.g., USD, should be retained in the FIE’s USD capital account and should not be transferred to its USD settlement account; the latter is meant only to receive foreign exchange payments under the current account, e.g., service income or trade income, and 2) registered capital in USD should be transferred from the USD capital account to the RMB basic account only after being converted into RMB as required for actual operational needs.
The funds in the USD capital account formerly could not be converted into RMB in a lump sum – the FIE could only convert USD into RMB as actually required for operations. If the amount to be converted were large, the WFOE had to submit related contracts and invoices to the local bank for review to prove the authenticity of the request.
The above system is still in place, but Notice 19 introduces a new concept – so-called “voluntary conversion” (意愿结汇) – which allows FIEs to convert 100% of the foreign exchange in their USD capital account into RMB in one go. To undertake voluntary conversion, an FIE should first open a special account with its bank. This account is called a foreign exchange conversion account for future payment (hereafter, Special Account), and it is separate and additional to the FIE’s USD capital account, USD settlement account and RMB basic account. USD can be converted to RMB and moved as a lump sum from the USD capital account to this Special Account, if desired.
Following the conversion to RMB when the FIE needs to use the funds in the Special Account, it must still submit relevant documents to the bank to prove the authenticity and legality of the payment request. If the enterprise requests payment as “petty cash”, Notice 19 states that it is unnecessary to provide documents to the bank supporting the authenticity of the translation. However, payments for petty cash should not exceed USD100,000 per month.
Compared with the established, general rules, the major difference under Notices 13 and 19 is that FIEs may convert USD and other foreign exchange capital into RMB in one go, rather than being required to hold it as foreign exchange until needed. However, when the RMB funds in the Special Account (which are still classed as “capital”) are taken from the account for use by the FIE, supporting documents showing actual demand will still need to be submitted, according to the terms described above, for review by an authorized bank to confirm that the proposed use is authentic.
In fact, so-called “voluntary conversion” has already been implemented in some special regions in China e.g. Shanghai Free Trade Zone and Suzhou Industrial Zone, as a pilot program since August, 2014. Notice 19 implements voluntary conversion nationwide starting from June 1, 2015.
Of course, it is permissible that an FIE does not use the new mechanism of voluntary conversion if it does not want to open a separate Special Account or if it is not interested to convert foreign exchange capital into RMB in advance of its actual use. In that case, the FIE can follow the general practice, converting foreign exchange capital into RMB only when there is a need for use of the funds and then depositing it directly into the RMB basic account.
ANNUAL FOREIGN EXCHANGE INSPECTION
The annual inspection of foreign exchange has been cancelled by SAFE and has been replaced by the foreign direct investment (FDI) current equity registration. Rather than going to SAFE to complete registration each year, an FIE should file the relevant information on SAFE’s Capital Account Information System through a CPA or local bank. While it is not yet clear whether a foreign exchange audit will still be required before the information can be filed on SAFE’s system, we generally expect that the foreign exchange audit can be waived if the information is filed on SAFE’s system through a local bank, rather than through a CPA.
Contributed by Jeff Sun of Jaguar Business Consultancy Ltd., Beijing
Questions? Please contact Allan Marson at firstname.lastname@example.org or +1 408-738-0592 #719 for a complimentary consultation with a member of our team on the new foreign exchange registration and conversion rules for FIEs.