Unlike most countries, the People’s Republic of China (“PRC1”) still imposes controls on the inflow and outflow of foreign exchange. The State Administration of Foreign Exchange (“SAFE”) is the agency tasked with the PRC’s foreign exchange control and regulates the cross-border flow of funds between the PRC and other countries.
As the establishment of a mechanism to facilitate the effective repatriation of funds is crucial during the overall business planning stage, greater care should be taken when a business subsidiary is to be located within the PRC.
The purpose of this note is to highlight the commonly available routes for repatriation of funds from the perspective of both foreign direct investment and cross-border transactions.
Repatriation of funds
Examples of methods of repatriation of funds by a company incorporated by a foreign entity in the PRC pursuant to PRC laws, a foreign-invested company (“FIC”), include dividend payments, capital reductions, repayments of inter-company loans2, payments to offshore service providers3, the use of onshore funds to access offshore funding4 and structured physical transactions5.
Under the PRC foreign exchange control regime, each route for inflow or outflow of funds to/from the PRC must be based on a specific type of transactions. Transactions are either “current account transactions” or “capital account transactions”.
“Current account transactions” generally refer to import and export of goods and provision of cross-border services. In theory, foreign exchange payments and receipts for “current account transactions” are permitted to be made without SAFE approval or registration, provided that the settlement bank has authenticated such transactions after reviewing the relevant documents.
“Capital account transactions”, such as cross border direct investments, including green-field investments, M&A, and investments in equity securities and bond markets, cross border loans and cross border guaranty etc. are subject to the prior approval of SAFE or registration with SAFE. Subject to certain conditions, multinational companies may enjoy special conveniences provided under the foreign exchange “cash pooling” system. This includes centralized foreign exchange payment and receipt, “netting” settlement for “current account transactions” as well as aggregation of foreign loan quota (“FLQ”) on a group-wide basis.