Foreign Exchange and the Capital Account

The following is an interview is with Liu Yi，an official at Fujian Branch of the SAFE，on foreign exchange procedures for transactions under the capital account. 

01

Q: If a foreign-funded company wants to use its retained profits to make a capital increase and there is no use of funds brought in from abroad，would the company need to register this with the State Administration of Foreign Exchange?

A：This must be registered at a bank. According to the Circular on Further Simplifying and Improving Policies for Foreign Exchange Administration for Direct Investment (SAFE Document [2015] No.13)，a company can select a bank at the place of its incorporation to register the use of retained profits for a capital increase.

02

Q: What differences are there between a capital investment by a foreign funded company that is not an investment firm and a reinvestment of profits (after distributions to shareholders) by a foreign company?

A: In the case of an investment by a foreign funded company，the recipient of the capital must register the investment. For the reinvestment of post-distribution profits，a registration of foreign direct investment must be made.

03

Q: Let me use the example of a domestic enterprise that was registered in 2017. A shareholder was a Chinese national who obtained permanent resident status in another country in 2010. If the shareholder wishes to increase capital，could he bring in funds from outside China and settle them under his own name?

A: Yes，but only if the company’s business license has been changed by the market regulatory authorities from a domestic enterprise to a foreign-funded one and the basic corporate information has been recorded at a bank in its place of its incorporation and where it has a  foreign exchange capital account. The settlement of the funds must also be made according to relevant capital fund settlement requirements.

04

Q: Domestic resident A set up a special purpose vehicle overseas in 2019 for the purpose of making a round-trip investment. This investment has been registered at a bank. If there is a change in the shareholding of the company's special purpose vehicle，is it necessary to register the change?

A: According to the Circular of the State Administration of Foreign Exchange on Foreign Exchange Administration of Overseas Investments and Financing and Round-Trip Investments by Domestic Residents via Special Purpose Vehicles (SAFE Document [2014] No.37)，in the event of any change in the basic corporate information，such as the company's shareholders，corporate name or operating duration，or other important information，such as increases and decreases in capital，equity transfers，swaps，or consolidations，the registered overseas special purpose vehicle needs to submit a revised registration with the appropriate foreign exchange bureau.

05

Q: If a foreign enterprise wants to register a company in China when the shareholder of this foreign enterprise is a Chinese citizen，is a round-trip investment permitted?

A: A round-trip investment is permitted if an individual domestic resident has made a registration of the use of foreign exchange for a special purpose vehicle. Based on the Circular of the State Administration of Foreign Exchange on Foreign Exchange Administration of Overseas Investments and Financing and Round-Trip Investments by Domestic Residents via Special Purpose Vehicles (SAFE Document [2014] No.37)，individual domestic residents are allowed to set up directly incorporated or indirectly controlled foreign companies by using the assets or equity rights and interests of domestic companies that they legally possess or the overseas assets or rights and interests they legally possess for the purpose of investment and financing.

06

Q: What should a wholly foreign-owned company do in the following situation? The manager of a foreign funded company tries to make an online registration of a company's shareholder equity by logging onto the SAFE online system but discovers there is no option for including the enterprise manager in the capital account system. This is because there is no way to use the system for registering equity rights and interests. What should be done in this case?

A: There have been changes since a joint annual reporting system for foreign investment information went into effect on January 1，2020. The Circular of the Ministry of Commerce，the State Administration for Market Regulation and the State Administration of Foreign Exchange on the Annual Report of 2019 Foreign Investment Information Reporting (MOFCOM Document [2019] No.72) stipulates that，since the 2019 annual report，foreign-invested enterprises need to submit an integrated annual report through the National Enterprise Credit Information Publicity System (www.gsxt.gov.cn) without making a declaration through the capital account information system of the State Administration of Foreign Exchange. The data collected will be shared among the Ministry of Commerce，the State Administration for Market Regulation and the State Administration of Foreign Exchange.

07

Q: A domestic enterprise which we will call Company A plans to buy a foreign enterprise which we will call Company C. Company C is owned by another foreign enterprise，Company B. At the same time foreign enterprise Company B plans to increase the capital of its domestic subsidiary，Company D. Can the funds from the sale of the Company B stake be transferred directly to Company D in renminbi?

A: Domestic institutions need to complete the procedures for outward remittances of overseas direct investment funds at a designated foreign exchange bank by presenting to the bank the approval document and the foreign exchange registration certificate for overseas direct investment issued by the overseas direct investment authorities in accordance with the Circular of the State Administration of Foreign Exchange on Issuing the Regulations on Foreign Exchange Administration of the Overseas Direct Investment of Domes