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Circular on Foreign Currency Capital of Foreign-Funded Enterprises (Circular 142) - State Administration of Foreign Exchange - 关于完善外商投资企业外汇资本金支付结汇管理有关业务操作问题的通知 - 国家外汇管理局
December 10, 2008
Edward J. Epstein
Olivia Lee
Released on August 29, and effective as of the same date
This circular is designed to reinforce China’s policies on stemming the inflow of “hot money” through foreign-invested enterprises (FIEs) by requiring:
1) capital verification by a local accounting firm before foreign exchange capital of an FIE can be converted into RMB;
2) converted capital to be used only as declared (in documents supporting the conversion application); the use must be within the FIE’s business scope and not for equity investments in domestic entities, unless such use has been specifically provided for or approved by the local arm of the State Administration of Foreign Exchange (SAFE);
3) that converted capital will not be used for domestic purchases of real estate (other than for the FIE’s own use) unless the FIE is a licensed real estate enterprise and its real estate projects provide for equity investment;
4) payment of foreign-denominated consideration to domestic sellers (for their disposal of equity in domestic entities) to be settled through SAFE-approved foreign exchange accounts; and
5) detailed documentation for conversion into RMB of any foreign exchange amount over USD 50,000.
In addition, SAFE will increase scrutiny of foreign exchange conversions into RMB to prevent the usage of converted RMB for other than approved purposes, or for repayment of unused RMB loans by FIEs. Penalties for violation include correction orders, confiscation of converted RMB, and fines up to 30 percent of the converted RMB amount.
Circular 142 appears to further complicate cross-border M&A activity, as it is unclear at this time how and to what extent the circular will be enforced for equity investment FIEs, private equity fund set-ups and Foreign-Invested Venture Capital Enterprises (all of which engage in acquisitions of equity in domestic entities). It is also unclear whether the restrictions on domestic equity acquisitions outlined above will extend to asset acquisitions as well.