(Promulgated by the State Administration of Foreign Exchange on March 3, 2003.)
To: Bureaux and foreign exchange administration departments in all provinces, autonomous regions and municipalities, and bureaux in the cities of Shenzhen, Dalian, Qingdao, Xiamen and Ningbo of the State Administration of Foreign Exchange (SAFE); and the head offices of all Chinese capital designated foreign exchange banks:
This Circular on issues related to the foreign exchange administration work concerning foreign direct investment is hereby issued as follows with a view to matching the new trend of international investment, introducing foreign investment in multiple channels, improving the foreign exchange administration concerning foreign direct investment, and further improving the environment for foreign investment:
I. Administration of Accounts and Capital Contributions of Foreign Investors
1. A foreign investor without any foreign-funded enterprise in the territory but engaging in direct investment or activities related to direct investment in the territory may apply to the SAFE bureau where the invested project is located for a foreign exchange account specially for foreign investors in the name of the said investor. The foreign investor is permitted to open a multi-currency special foreign exchange account only at one bank, except for cases approved by SAFE. The said account shall be in line with purposes divided into the following four categories:
1) Investment-type account. A foreign investor who contracts projects, undertakes co-operative exploration, development and prospecting of resources, or engages in venture capital investment in the territory may, after obtaining the business license for non-legal persons, apply to open an account for depositing and paying related foreign exchange capital;
2) Acquisition-type account. If a foreign investor wishing to establish a foreign-funded enterprise in the territory needs to acquire land-use right and attached real estate, machinery and equipment, or other assets in the territory during the pre-stage, after the contract for asset acquisition takes effect an application to open an account for depositing and paying foreign exchange proceeds related to the acquisition may be made;
3) Fee-type account. If a foreign investor wishing to establish a foreign-funded enterprise in the territory needs to undertake preparatory work such as market survey, planning and preparation for establishment of organisation, it may after receiving the notice of pre-approval for the company name, granted by the administration for industry and commerce, apply to open an account for depositing and paying related foreign exchange capital;
4) Guarantee-type account. Before a foreign investor invests in the territory, if according to relevant provisions and the agreement of the contract it needs to provide capital guarantee to an organisation in the territory, an application to open an account for depositing and paying foreign exchange guarantee capital within the term as agreed in the contract shall be made. When applying for a special foreign exchange account, the foreign investor shall present to the foreign exchange administration proof of the genuineness and legality of its investment activity. The foreign exchange administration shall ratify the upper limit amount of capital, maturity, scope of payments and related matters of the related account, and also conduct routine supervision. The capital in a special foreign exchange account of a foreign investor shall be remitted inward in spot exchange, and cash deposit is not permitted. Settlement and transfer of capital in such an account shall be certified by the foreign exchange administration deal by deal.
For acquisition-type, fee-type and guarantee-type special foreign exchange accounts of foreign investors, if a foreign investor sets up a foreign-funded enterprise in the territory, the balance of capital in the above-mentioned accounts may be transferred to the capital account of the enterprise. The capital settled and transferred from the above-mentioned accounts may all be used as capital contribution of the foreign side upon presentation of the related certificate of ratification by the foreign exchange administration, and capital verification procedures may be handled accordingly. If the foreign investor does not have any foreign-funded enterprise in the territory, it may by presenting the related certificate of ratification by the foreign exchange administration handle the foreign exchange purchase of the unused funds and remit the said capital outside the territory.
2. If a foreign investor uses capital deposited in an offshore account at a designated foreign exchange bank engaging in offshore business with the approval of the People's Bank of China as capital contribution to a foreign-funded enterprise in the territory, the transfer of foreign exchange capital to the capital account of the enterprise in the territory from the said offshore account does not need the ratification by the foreign exchange administration. However, when the foreign-funded enterprise handles the certificate inquiry procedures in capital verification, the bank of inward remittance shall put the words of ?¡ìoffshore capital?¡§ on the reply to the bank inquiry letter with regard to the said capital.
If a foreign investor makes capital contribution to a foreign-funded enterprise with the foreign exchange capital in a non-resident individual spot exchange account in the territory, the foreign exchange administration shall after examining the related materials submitted, without finding any error, issue a relevant certificate of approval for foreign exchange business under capital account, with which the bank may handle the transfer of the said capital from the non-resident individual spot exchange account to the capital account of the foreign-funded enterprise, and the enterprise may handle the capital verification inquiry procedures and the foreign exchange registration procedures related to foreign investment. SAFE bureaux with a large business volume may, after approval by SAFE, grant the examination power for the above-mentioned capital transfer business to designated foreign exchange banks and have the designated foreign exchange banks exercise the relevant duties of examination, statistics, monitoring and reporting for record. The authorized designated foreign exchange banks shall have a strict internal control system and have no record of a significant act in violation of regulations concerning foreign exchange in the previous three years. When a foreign-funded enterprise handles capital verification inquiry procedures, the bank of inward remittance shall put the words of ?¡ìnon-resident individual transfer in the territory?¡§ on the reply to the bank inquiry letter with regard to the said capital.
3. In addition to such capital contribution forms as freely convertible currencies, imported equipment and other materials, intangible assets and Renminbi profits, a foreign investor may, with the approval of the foreign exchange administration, also make capital contribution to a foreign-funded enterprise in the following forms:
1) The foreign-funded enterprise converts development fund, reserve (or capital reserve, or surplus reserve) or others into capital of the enterprise;
2) The foreign-funded enterprise converts undistributed profits, payable dividends and related payable interests into capital of the enterprise;
3) The foreign-funded enterprise converts the registered foreign debt capital of the foreign side and the interests for the current period into capital of the enterprise.
4) The foreign investor reinvests properties earned through recouping investment, liquidation, equity transfer and capital reduction from the foreign-funded enterprises already invested in the territory.
If a foreign investor makes capital contribution in any of the above-mentioned forms, the foreign exchange administration will, after examining the submitted materials without finding any error, issue a relevant certificate of ratification for foreign exchange business under capital account, upon presentation of which the bank may handle domestic transfer and the enterprise may handle the capital verification inquiry and foreign capital foreign exchange registration procedures.
4. If a foreign investor or an investment-type foreign-funded enterprise acquires the equity of a domestic enterprise, it shall according to provisions of laws, regulations and rules and the agreement of the contract signed by the two sides pay the cost for the equity purchase (i.e. the cost paid by the foreign side to the Chinese side for the purchase of equity from the Chinese side, and its form may be foreign exchange capital of the foreign investor or the investment-type foreign-funded enterprise, or Renminbi profits obtained from other invested foreign-funded enterprises in the territory, or other lawful properties), and by itself or via the equity transferor handle the foreign capital foreign exchange registration procedures for exchange earnings from equity transfer at the local foreign exchange administration where the transferor is located. If the cost for equity purchase is paid in a lump sum, the foreign capital foreign exchange registration procedures for exchange earnings from equity transfer shall be handled within five days after the said cost is paid; if the cost for equity purchase is paid by installment, the foreign capital foreign exchange registration procedures for exchange earnings from equity transfer shall be handled within five days after the cost for each installment is paid.
Before the foreign investor pays the full cost for equity purchase, its owner's equity in the acquired enterprise shall be determined according to the actual payment, on which related equity transfer, capital reduction, liquidation, outward profit remittance and other foreign exchange businesses shall be handled accordingly.
After examining the materials submitted by a foreign investor without finding any error, the foreign exchange administration shall handle the foreign capital foreign exchange registration procedures for foreign exchange earnings from equity transfer for the said foreign investor, and also issue the relevant certificate. The certificate for foreign capital foreign exchange registration for foreign exchange earnings from equity transfer is a valid document to prove that the foreign side has paid the cost for equity acquisition, and is also an important basis for the acquired enterprise to handle the foreign capital foreign exchange procedures. All SAFE bureaux and foreign exchange administration departments shall summarize the data on foreign capital foreign exchange registration for foreign exchange earnings from equity transfer (including the number of registrations and the amount) and other types of data on registration of foreign capital inflow according to the new formula set out in the "Report on Registration of Foreign Capital Foreign Exchange", and report to SAFE month by month. Use of the original formula in the "Report on Registration of Foreign Capital Foreign Exchange" shall be stopped as of the day when this Circular takes effect.
5. If a non-investment-type foreign-funded enterprise invests to establish or acquire an enterprise in the territory according to the Interim Provisions on Investment in the Territory of Foreign-funded Enterprises promulgated jointly by the Ministry of Foreign Trade and Economic Co-operation and the State Administration for Industry and Commerce, and the invested enterprise does not involve foreign capital, it is unnecessary to handle the foreign exchange registration, capital verification inquiry, and foreign capital foreign exchange registration procedures for foreign-funded enterprises. Upon presentation of the "Business License for Enterprise Legal Person" with the words of "investment of foreign-funded enterprises" issued by the administration for industry and commerce to the invested enterprise, the foreign exchange administration will administer the invested enterprise as a foreign-funded enterprise in terms of foreign borrowing.
The foreign exchange administration shall not approve any domestic transfer of foreign exchange capital between a non-investment-type foreign-funded enterprise and its invested enterprises and between different invested enterprises of a non-investment type foreign-funded enterprise. In special cases when such domestic transfer is really necessary, the SAFE bureau or foreign exchange administration department shall make a report to SAFE.
6. A domestic enterprise in which the capital contribution of the foreign side is less than 25% of the registered capital shall handle the foreign exchange registration procedures for foreign-funded enterprises by presenting the certificate of approval for foreign-funded enterprise with the words of "the proportion of foreign capital is less than 25%" issued by the department in charge of foreign trade and economic co-operation and the business license for foreign-funded enterprises with the words of "the proportion of foreign capital is less than 25%" issued by the administration for industry and commerce, and shall also handle the capital verification inquiry and foreign capital foreign exchange registration procedures according to relevant provisions.
II. Capital Verification Inquiry and Foreign Capital Foreign Exchange
Registration of Foreign-Funded Enterprises
Issues related to capital verification inquiry and foreign capital foreign exchange registration of foreign-funded enterprises shall be handled according to the following principles:
1. When the foreign exchange capital paid by a foreign investor for the establishment of a foreign-funded enterprise exceeds the given upper limit of the capital account of the enterprise, if the part of capital in excess of the limit does not exceed 1% of the upper limit of the foreign exchange capital account of the enterprise and the absolute amount does not exceed US$10,000 equivalent, the foreign exchange administration may handle the capital verification inquiry and foreign capital foreign exchange registration for the enterprise according to the actual amount entering into the account.
The amount of foreign exchange premiums, in excess of the multiple of the proportion of equity investment and the registered capital of an enterprise, paid by a foreign investor to the enterprise at the time of equity investment because of appreciation of capital of the enterprise shall be counted into the upper limit of the capital account of the enterprise. The entry into account of the foreign exchange capital in excess of the limit shall be handled still according to the principle as mentioned in the preceding paragraph.
2. When a foreign-funded enterprise in which a foreign investor invests in physical assets entrusts an accounting firm to make an inquiry with the foreign exchange administration, if the amount of value appraised on the invested physical assets by the value appraisal agency of the commodity inspection department does not comply with the amount on the customs declaration for import goods, the foreign exchange administration shall use the amount of value appraised by the commodity inspection department when handling the capital verification inquiry and foreign capital foreign exchange registration for the enterprise.
3. When a foreign-funded enterprise in which a foreign investor invests only in intangible assets entrusts an accounting firm to make an inquiry with the foreign exchange administration, it shall list the said intangible assets on the sheet of capital contribution conditions attached to the inquiry letter about capital contribution conditions of the foreign side, with which the foreign exchange administration may handle foreign capital foreign exchange registration concerning investment in intangible assets and at the same time shall state on the reply to the inquiry letter about capital contribution conditions of the foreign side the following: "The said investment in intangible assets, of the foreign side has been registered, under the number of xxxxxx. The said reply only has the effect of providing its registration".
4. If the amount of value appraised is bigger than the amount declared at the customs because of premium investment, minor equity investment and investment in physical assets of the foreign side, or the actual capital contribution to a foreign-funded enterprise is bigger than its registered capital because of change of exchange rate or other similar reasons, the registered capital of the enterprise and the actual capital contribution to the enterprise, after input of the capital premiums, shall be registered according to the actual conditions.
5. If an enterprise that transfers processing on foreign supplied materials, designs and samples and compensation trade into investment entrusts an accounting firm to make an inquiry with the foreign exchange administration, it shall submit related materials to the foreign exchange administration. After examination and confirmation that the equipment in the said transferred investment belongs to the imported goods on which external exchange payment has not been made, the foreign exchange administration may, in line with the amount displayed on the letter of commodity value appraisal, issue a reply to the inquiry letter about foreign capital contribution conditions, and also handle the foreign capital foreign exchange registration procedures.
6. If the name of a foreign investor of a foreign-funded enterprise is inconsistent with the name of the payer of foreign investment capital, the foreign exchange administration may handle the capital verification inquiry letter and the foreign capital foreign exchange registration, but at the same time shall state in the reply to the inquiry letter about foreign capital contribution conditions the words The payer is inconsistent with the investor."
7. In order to facilitate non-local search of certificates of approval for foreign exchange business under capital account, the foreign exchange administration shall state the contact person and contact phone number concerning related business when issuing certificates of approval for foreign exchange business under capital account to foreign-funded enterprises.
8. If the foreign exchange administration discovers any designated foreign exchange bank violates the rules on account administration such as opening accounts for enterprises without authorization or letting capital in excess of the limit enter into account, it shall give a penalty according to the Provisions on Administration of Foreign Exchange Accounts in the Territory.
If it is discovered that any enterprise forges or alters the certificate of approval for foreign exchange business under capital account, or reply of foreign exchange administration or designated foreign exchange banks, or customs declaration for import goods, or other certificates or documents, the related materials shall be handed over to the judicial body.
If, after an accounting firm issues a capital verification report to an enterprise, the foreign exchange administration discovers that the accounting firm fails to handle or fails to handle according to the provided procedures the capital verification inquiry, it shall order the accounting firm to rehandle the capital verification inquiry procedures and at the same time inform the local association of certified public accountants of its act in violation of regulations. Before the local association of certified public accountants makes a formal penalty decision, it shall no longer handle any new capital verification inquiry business of the accounting firm. As to accounting firms that violate regulations again, after being punished, the SAFE bureaux and foreign exchange administration departments shall report their names to SAFE, who will make a public disclosure on its website and other media and also suggest that enterprises be cautious in selecting accounting firms. If the foreign exchange administration discovers the capital verification report issued by an accounting firm is a fake capital verification report, when the accounting firm that fails to handle or fails to handle according to the provided procedures the capital verification inquiry rehandles the related procedures, it shall hand over the related materials to the judicial body, and at the same time inform the local administration for industry and commerce.
III. Administration of Capital Reduction of Foreign-funded Enterprises
and Partial Adjustment of Administrative Work
1. If capital reduction in a foreign-funded enterprise by a foreign investor involves purchase and payment of foreign exchange, the foreign exchange administration shall, after examining the related materials submitted by the enterprise without finding any error, issue a relevant certificate of approval for foreign exchange business under capital account, upon presentation of which the foreign investor may handle the foreign exchange purchase and payment and outward remittance procedures related to the part of capital reduced.
If a foreign-funded enterprise reduces capital for the purpose of reducing book loss, or the reduced capital has not been paid by the foreign side, the foreign exchange administration may neither approve the foreign investor to re-invest the related part of capital reduced in the territory nor approve the foreign-funded enterprise to use it for external exchange payment.
2. The actually paid capital system as provided by the Company Law of the People's Republic of China applies to capital contribution of the foreign side to foreign-funded stock limited companies and fund management companies involving foreign equity investment. These two kinds of companies need not submit the legal person business license for foreign-funded enterprises issued by the administration for industry and commerce when they apply to the foreign exchange administration for opening capital accounts of foreign-funded enterprises. A foreign-funded stock limited company may handle related procedures by presenting the certificate of approval for foreign-funded stock limited company issued by the department in charge of foreign trade and economic co-operation, while a fund management company involving foreign equity investment may do so by presenting the certificate of approval for foreign-funded enterprises issued by the department in charge of foreign trade and economic co-operation and the reply to opening issued by the China Securities Regulatory Commission.
As to other examination materials required by the foreign exchange administration with regard to opening of capital accounts and handling of foreign exchange registration for foreign-funded enterprises concerning these two kinds of companies, relevant provisions shall still apply.
3. If the foreign exchange administration needs to examine the capital verification report of a foreign-funded enterprise when handling foreign exchange business, in cases where the capital verification report was made after May 1, 2002, the reply to the inquiry letter about the capital contribution conditions of the foreign side shall also be examined. If the foreign exchange administration needs to examine the audited report of a foreign-funded enterprise when handling foreign exchange business, in cases where the audited report was made after 2002, the Statement on Foreign Exchange Payments of the said foreign-funded enterprise shall also be examined.
4. In order to further improve the efficiency in supervision over capital exchange settlement and facilitate enterprises in operating investment capital, the materials that shall be examined by the authorised bank in the capital exchange settlement operational procedures, as provided by the SAFE Circular on Reforming the Capital Exchange Management Ways under the Account of Foreign Investment (SAFE Document No. 59 [2002]), are simplified hereby into the following three kinds:
1) Written application of the enterprise (in which the capital account number of the enterprise, the conditions about capital payment, the type of currency for exchange settlement, the amount, the purpose, and others shall be stated);
2) Foreign exchange registration certificate of the enterprise;
3) Other materials to be supplemented in line with specific circumstances.
Other examination requirements shall still follow the relevant provisions and operational procedures provided by the SAFE Circular on Reforming the Capital Exchange Management Ways under the Account of Foreign Investment (SAFE Document No. 59 [2002]).
5. If a Sino-foreign contractual joint venture pays in advance investment returns (including fixed returns) to the foreign side with proceeds from depreciation of fixed assets or from amortization of intangible assets, the examination of the related "letter of guarantee" in the Operational Procedures for Foreign Exchange Administration Business under Capital Account (SAFE Document No. 28 [2001]) shall be changed to implementation according to the following provisions:
1) If the contractual joint venture has debts (bank loans or loans of the foreign side shareholder), the foreign investor shall present a letter of guarantee for the relevant amount issued by a foreign-capital financial institution established in the Chinese territory;
2) If the debts of the contractual joint venture are only loans of the foreign side shareholder, a letter of guarantee issued by the foreign side shareholder that commits unconditioned joint liability to the debts of the contractual joint venture may substitute the above-mentioned letter of guarantee issued by a financial institution;
3) If the contractual joint venture has no debt, the foreign investor has no need to present a letter of guarantee.
Other examination requirements shall still follow the relevant provisions of the Operational Procedures for Foreign Exchange Administration Business under Capital Account.
IV. Other Items
1. The "foreign exchange administration" mentioned in this Circular refers to SAFE and its bureaux, foreign exchange administration departments and all sub-bureaux under their jurisdiction.
2. All SAFE bureaux and foreign exchange
administration departments are asked to on-issue the following part of this Circular concerning operation of banks to the designated foreign exchange banks under their jurisdiction:
1) The contents of articles 1, 2 and 3 in Part I titled "Administration of Accounts and Capital Contributions of Foreign Investors", and the relevant appendixes 1-6 of this Circular;
2) The first article and the first paragraph of the eighth article in Part II titled "Capital Verification Inquiry and Foreign Capital Foreign Exchange Registration of Foreign-Funded Enterprises";
3) The fourth article in Part III titled "Administration of Capital Reduction of Foreign-funded Enterprises and Partial Adjustment of Administrative Work",
3. This Circular shall take effect on April 1, 2003. If there is any problem in implementation, please contact the Capital Account Management Department of SAFE.
