New rules take many decisions out of SAFE hands
Yi Lu and Sophie Han of Paul Hastings explain the implications of Circular 59, which promotes foreign direct investments and outbound investments
What are the important messages that Circular 59 brought to us?
Last November, the State Administration of Foreign Exchange issued the Circular Regarding Further Improvement and Adjustment of Foreign Exchange Administration Policy of Foreign Direct Investments (Circular 59). It is a signal that SAFE is transitioning its role from micro to macro administration. It removes many of the approval requirements put in place over the past 10 years, thus expediting foreign direct investments. Mainland banks now have authority to review and process more foreign exchange transactions directly.
What are the primary benefits that Circular 59 brought for foreign investors?
Investors planning to make greenfield investments are no longer required to obtain SAFE's approval to open foreign exchange bank accounts. They can now open them directly. If a foreign investor has opened a bank account to pay preliminary investment costs, they no longer need SAFE approval to convert foreign exchange in this account into RMB. They also don't need permission if they plan to use the profits to form another company in China or increase its capital.
Does Circular 59 have any impact on cross-border M&A transactions?
Yes. For example, in a cross-border equity transfer deal where a Chinese shareholder sells its company to a foreign investor, SAFE now has to confirm that the foreign investor has paid the whole price to the Chinese seller. Since December, if the purchase is made in cash, SAFE's system will automatically register the completion of payment. If the price includes non-cash consideration, the target company has to register with SAFE to confirm full payment. That being said, foreign-invested enterprises (FIEs) are still prohibited from converting their registered capital into RMB to make equity investments in China (unless their business scope covers equity investments), purchase non-self-use real properties, or invest in securities (unless otherwise permitted by law).
Does Circular 59 have any impact on FIEs?
Yes. They no longer have to get approval for (i) converting registered shareholder loans and other registered foreign debts to the FIEs' registered capital; (ii) using reserves and undistributed profits to increase their registered capital; (iii) repatriating proceeds from capital reduction, liquidation or realised investments to their foreign shareholders; or (iv) extending loans to their foreign shareholders (with certain amount limits).
In particular, foreign-invested holding companies now don't have to get approval for money wiring to make further investments.
These holding companies' Chinese subsidiaries now don't have to obtain approval to remit foreign exchange profits and dividends to the holding companies. Foreign exchange registration requirements for these holding companies' Chinese subsidiaries are removed (unless these subsidiaries are joint ventures with foreign investors).
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