As reported in New Foreign Exchange Rules for FIEs, a foreign invested enterprise (FIE) in China should no longer be required to apply through the State Administration for Foreign Exchange (SAFE) to verify receipt of an injection of paid-in capital. It need no longer hire a qualified CPA to produce a Capital Verification Report (CVR). Instead, the FIE can request its SAFE-certified bank handle the capital registration procedure. However, in practice some banks in Beijing (and likely other cities) are still requiring a Capital Verification Report.
In the past, injected capital could not be released from an FIE’s foreign exchange capital account until a qualified CPA issued a CVR. If the capital were released without a CVR, it became trapped in China and could not be remitted out as return of capital, but had to be recognized as income to the FIE, with attendant tax consequences.
The Administration for Industry and Commerce and Ministry of Commerce had already eliminated the requirement for a CVR some time ago, but certain local SAFE branches still required a CVR as a prerequisite to converting paid-in foreign exchange capital to Renmibi, the local currency. Now that the paid-in capital registration has been delegated by SAFE to local banks in China, it should be clear that a CVR is no longer necessary.
A recent inquiry in Beijing, indicated that some banks, especially foreign-invested banks, are still requiring a CVR to convert registered capital to Renminbi. However, other banks responding to the inquiry no longer require a CVR, but handle the capital registration procedures themselves.
This divergence is not very surprising. While SAFE has delegated the responsibility for registering paid-in capital to the banks, the documents required to confirm capital have not yet been clearly specified. Some banks have adopted a conservative view on compliance to avoid any potential difficulties. Even though the CVR seems superseded by Notice 13, it is within the bank’s discretion to require a CVR and some do so to minimize their exposure to compliance risk.
When the FIE’s bank completes registration of the paid-in capital, it should issue a document evidencing receipt of payment (出资入账登记), which should be retained for use in future agency filings and as a key document proving ownership of the FIE.
If your FIE is faced with a demand for a CVR, we suggest discussing Notice 13 with the FIE’s bank or opening the FIEs accounts with another bank.
Thanks to Jeff Sun of Jaguar Business Consultancy Ltd., Beijing, for input on this note.
Questions? Please contact Allan Marson at firstname.lastname@example.org or +1 408-738-0592 #719 for a complimentary consultation on the new foreign exchange registration and conversion rules for FIEs.