China’s SAFE further innovates its registration procedures in capital account transactions

New rules of the State Administration of Foreign Exchange published on 28 February 2015 aim to facilitate the PRC foreign exchange registration process in cross-border inbound and outbound investments. The new rules, which take effect from 1 June 2015, originate in the financial reform which the People’s Bank of China first rolled out in the Shanghai Free Trade Zone at the end of 2013 (see our earlier alert), and reflect China’s gradual change from a prior approval and registration-based approach to a post-supervisory approach to regulation.

The key changes introduced by the new rules are as follows:

  • For both inbound and outbound investments, subject to certain exceptions, all foreign exchange registration procedures that need to be undertaken with SAFE under the current rules including the making of foreign invested enterprise information filings, the registration of pre-incorporation expenses and the registration of outbound investments and special purpose entities outside the PRC, will from 1 June 2015 be handled through foreign exchange banks directly, rather than through SAFE.
  • Pre-incorporation expenses in excess of US$300,000 per project or (for outbound investments) 15 per cent. of the Chinese investor’s total investment, the conversion of cross-border loans in outbound investments to equity and the outward remittance of the proceeds of sale of securities by foreign investors will still require approvals to be obtained from, or filings made with, SAFE.
  • In the case of inbound investments, the new rules exempt foreign investors from the need to make any filings (whether with SAFE or banks) of cash and non-cash capital contributions to PRC companies and payments made to domestic shareholders for the acquisition of PRC equity interests. Cash contributions made by foreign investors to foreign invested enterprises in the PRC still need to be recorded with SAFE, but rather than the investors having to make any filing, the payments will be automatically recorded by the banks with SAFE.
  • In the case of outbound investments, foreign exchange registration will cease to be required for investments made by an entity outside the PRC which is established or controlled by a PRC entity.
  • In the process of verifying a transaction, the new rules require the party making a payment or registration to provide, and the bank to request, other related information relating to the applicant or the transaction. Banks will need to develop their own sets of customer information requirements which, in order to enable the banks to comply with their duties, may be more extensive than the required documents listed in the new rules.
  • In place of the current annual review process, the relevant PRC foreign invested enterprises and the PRC entities undertaking outbound investments will need to complete annual foreign exchange filings with SAFE. Banks will be required to check that the annual filings have been completed before processing the relevant foreign exchange registrations for these entities.
  • SAFE will check the information recorded in annual filings on a random basis. If any information is found to be inaccurate, SAFE can, by initiating a procedure in its information system, suspend the making of further registrations by the applicant, and banks will not be permitted to process the applicant’s transactions once the suspension is in effect.

Reference: Notice on Foreign Exchange Management Policy about Further Simplification and Improvement of Direct Investment (关于进一步简化和改进直接投资外汇管理政策的通知)

Issuing authority: State Administration of Foreign Exchange (“SAFE”)