China
Foreign Exchange Administrative Measures Governing Overseas Direct Investment by Domestic Institutions
In order to encourage and regulate the overseas investment by domestic institutions, the State Administration of Foreign Exchange (SAFE) has issued the provisions, which will be effective on August 1st, 2009.
The main points of the provisions are as follows?
- The provisions expand the sources of foreign exchange by means of adding foreign exchange obtained in PRC, currency loans, payments in kind, intangible assets and others approved by SAFE for overseas investment.
- Institutions can keep the profits obtained from investments abroad for further direct investment or remit them back to China. For the latter way, institutions have an option to keep them in currency accounts or convert into RMB.
- Domestic transfer of shares in overseas investments should be operated in RMB.
Provisions will allow foreign exchange management for foreign direct investment in a more standardized and systematic manner, in favor of domestic institutions grasping the opportunity to improve the efficiency of foreign direct investment. At the same time, these new regulations are also conducive to improve the statistical monitoring and promoting China's basic balance of international payments.
CBRC New Rules on Fixed Assets Loan & Project Finance
1) Guidelines for Project Finance Business, [2009] No.71
2) Provisional Measures on the Administration of Fixed Assets Loans, CBRC Order [2009] No.2
In order to regulate the fixed assets loans and project finance business of the commercial banks, China Banking Regulatory Commission (“CBRC”) released the Guidelines for Project Finance Business on July 18, 2009, and the Provisional Measures on the Administration of Fixed Assets Loans on July 23, 2009. Both of the regulations apply to all banking institutions and will come into force three months after the date of its promulgation.
As a conclusion, the Provisional Measures and the Guidelines reflect the efforts by the regulator to enhance supervision of large amount loans. Banks thus need to make more detailed risk control internal policies in terms of loan documentation and disbursement procedures. At the same time, banks also need to consider how to implement some of the requirements in the Provisional Measures and the Guidelines, such as ensuring the truthfulness and completeness of due diligence reports and how to accommodate the “pay on trust of the borrower” rule with the various funding demands of borrowers.
Measures for the Administration of Pilot RMB Settlement in Cross-border Trade
1) Measures for the Administration of Pilot RMB Settlement in Cross-border Trade “Measures”
2) The Implementation of Measures for the Administration of Pilot RMB Settlement in Cross-border Trade “Implementation” (July 3rd , 2009)
The “Measures” and the “Implementation” stipulate for the first time that some designated and qualified enterprises are allowed to implement the RMB settlement in cross-border trade in the pilot areas. The authorities determine the list of enterprises according to their qualities and the recommendation from local government. The central bank of China will supervise the whole procedure and control the total amount of pilot RMB settlement.
The announcement of the “Measures” and the “Implementation” represents a substantial step for China’s RMB settlement in cross-border trade and RMB settlement will enter into a new starting point for cross-border trade. The specific arrangements in the “Measures” and the “Implementation” are effective in avoiding the risk of exchange rate fluctuations. They can help RMB to achieve regionalization and internationalization. Meanwhile, the “Measures” and the “Implementation” can also provide enterprises with various kinds of services such as RMB trade financing and export buyers' credit.
In addition, the “Measures” and the “Implementation” also stipulate that the qualified domestic commercial banks are allowed to provide RMB settlement services in cross-border trade in the pilot areas. The qualified commercial banks shall sign the RMB settlement agency agreement with the foreign banks which participate in the cross-border trade. Then the domestic banks need to open bank accounts of the foreign banks for RMB settlement and cooperate with them as their agency. The central bank of China will determine the service scope of RMB settlement and supervise the operation of RMB settlement in cross-border trade.
Chinese banks, which are participating in cross-border trade RMB settlement, will be able to introduce more settlement services such as documentary letter of credit, documentary collection, remittance, pre-receipt and pre-payment. Chinese banks have good opportunities to take advantage in expanding their business scope and improving their abilities to achieve internationalization from these new regulations.
Provisions on M&A of a Domestic Enterprise by Foreign Investors
No.6 Decree of the Ministry of Commerce PRC on Promulgation of the Provisions on M&A of a Domestic Enterprise by Foreign Investors “Provisions”
In order to ensure “Provisions” coincide with the Anti-monopoly Law and the Provisions of the State Council on Thresholds for Declaration of Concentrations of Undertakings, revisions have been made and new “Provisions” were announced on June 22nd, 2009.
According to the Anti-monopoly Law, if a concentration reaches the threshold of declaration, a declaration must be lodged in advance with the Anti-monopoly Authority under the State Council. M&A is regarded as one method of reaching the concentration and should be certainly regulated. The new “Provisions” add one article to regulate the same standard and requirement as the Anti-monopoly Law in order to keep the consistency between different laws and regulations. Meanwhile, some little changes of words and expressions have been made in order to avoid the controversy and misunderstanding. For example, the “ultimate controller” has been revised to the “actual controller”. The modification in the new “Provisions” ultimately ensures the general terms’ accurate use in different laws and regulations.
New Measures on Growth Enterprise Market
1) Measures for the Issuance Examination Committee of China Securities Regulatory Commission (June 14,2009)
2) Administrative Measures for the Recommendation Business of the Issuance and Listing of Securities (June 14,2009)
The Measures stipulate the continuance supervision period for newly-listed companies on Growth Enterprise Market shall be the remainder of the listing year and 3 whole accounting years. The continuance supervision period for list companies on Growth Enterprise Market issuing new shares or convertible bonds shall be the remainder of the listing year and 2 whole accounting years. During the foresaid continuance supervision period, the recommendation institutes shall conduct tracking report and express independent views to relevant issues.
The Measures also clarifies the member numbers of the Issuance Examination Committee. A special examination committee is intended to be established for Growth Enterprise Market.
Administrative Provisions on Foreign Institutions Providing Financial Information Service in China
On June 1, MOC, Information Office of State Council and the administration for Industry and Commerce issues the Administrative Provisions on Foreign Institutions Providing Financial Information Service in China (hereafter referred to as “Provisions”).
The Provisions stipulates general approval procedure for the foreign institutions who purpose is to provide financial information service in China and procedure for foreign institutes who want to invest in established information service company. The Information Office of State Council is the supervision and examination authority of the foresaid foreign institutions providing financial information service.
Supreme Court issues two Judicial Interpretations on Property Law
1) Interpretation on Issues concerning the Specific Application of Law in Handling Building Differentiation Ownership Cases (May 24, 2009)
2) Interpretation on Issues concerning the Specific Application of Law in Handling Property Management Service Cases (May 24, 2009)
These are the first two interpretations the Supreme Court issued regarding Property law. The Interpretations attach great importance to the rights of the owner and intend to balance the interests between property management company and owners. The property management service relationship without written contract will not be recognized.
The Interpretations stipulate the recognition of owner, the definition of exclusive areas and co-owned areas, parking area and garage, the use of co-owned areas for commercial purpose, the condition for conversion from residential purpose to commercial purpose, nullification of causes exempting property management company from liability and fees, withdrawal of property management company.
Supreme Court issues new interpretation on Contract Law
On May 12, Supreme Court promulgates the Application of the Contract Law (hereafter referred to as “Interpretation”). The Interpretation clarifies issues frequently dealt with the Contract Law in the judicial practice.
The Interpretation stipulates the application principle of circumstances change, several issues regarding to the formation and validity of contract which including place of contracting, clauses required to form a contract and mandatory provisions which infringement may invalidate contract. The Interpretation also adjust the liquidated damage for default, the set-off rules and revocation rights of the obligees.
China Adopts Controversial Extraterritorial & Retroactive Tax and Disclosure Rule Relating to Share Transfers by Non-Resident Enterprises
The PRC State Administration of Taxation issued the Notice on “Strengthening the Management of Enterprise Income Tax Collection of Income from Share Transfers by Non-resident Enterprises”, on December 10, 2009 (the "Notice").
The Concept of “Income” for the Purpose of the Notice.
“Income” in the Notice is defined as income derived from direct or indirect transfers of shares of Chinese resident enterprises, by non-resident enterprises.
However, income derived from buying and selling shares of listed Chinese resident enterprises in the public stock exchange markets is not included within the scope of the Notice.
Calculation of Share Transfer Income
The taxable share transfer income is defined as share transfer price minus the cost of share investment. Share transfer price refers to the consideration received by the transferor in the form of cash, non-cash assets, share, etc. Cost of share investment refers to the contribution to a Chinese resident enterprise for investment by the transferor, or the consideration paid by the transferor in order to purchase the share of the Chinese resident enterprise.
Indirect Share Transfer
The Notice indicates that ultimate foreign investors are required to disclose the required documents regarding indirect transfers of Chinese resident enterprises to the PRC tax authorities under the following circumstances:
- If an intermediate holding company transfers its own share to a third party; and
- This intermediate holding company is located in a low tax jurisdiction or such jurisdiction exempts income tax on foreign-sourced income.
The documents to be disclosed are as follows:
- Share transfer contract or agreement;
- The relationship between the foreign investor and the intermediate holding company in terms of cash flow, operations, purchase & sales, etc.;
- The business operation, personnel, financial accounts, and assets of the intermediate holding company;
- The relationship between the intermediate holding company and the Chinese resident enterprise in terms of cash flow, operations, purchases & sales;
- Explanation of the reasonable business purpose for the foreign investor to set up the intermediate holding company;
- Other documents required by the tax authority.
Though the term "indirect transfer" is not defined in the Notice , it is presumed that indirect transfer refers to a case where an intermediate holding company which is set up by a foreign investor transfers its own shares -rather than the shares of the residence enterprise- to a third party. Sometimes, the foreign investor may use many levels of intermediary holding companies in different countries to accomplish the share transfer. No matter how complicated the cases are, the disclosure shall be required for review as long as the foreign investor has a little relationship with the shares being transferred.
Retroactive Effect
The notice comes into effect 1 January 2008 retroactively, which means the rules in the Notice can apply to share transfers of years in 2008 and 2009.
Comments and Conclusions
The Notice could be applicable to all “global M&A” transactions taking place out of China as long as the transferor of the shares indirectly holds some equity assets in China.
Foreign investors which have conducted, or will conduct in the future, such share transfers will require a more thorough review of the business structure and tax planning put in place -or to be put in place-.
Depending on the share structure of the off-shore intermediary companies, and how the transfer is structured, some of these burdensome procedures could be avoided. This corporate and tax planning is obviously necessary in order to avoid some unwanted consequences.
The Ministry of Finance and the State Administration of Taxation issues New Rules on Income Tax Treatment of Corporate Restructuring
On April 30 the Ministry of Finance and the State Administration of Taxation issues the Notice on Several Issues Concerning the Enterprise Income Tax Treatment of Corporate Restructuring (hereafter referred to as “Notice”) , which take effect from Jan 1 2009.
Corporate restructuring in the Notice is classified to six catalogues, namely change of legal form, debt restructuring, equity acquisition, asset acquisition, merger and division.
Depending on different situations, ordinary or special tax treatment shall be applied to corporate restructuring. The Notice stipulates specific conditions on which special tax treatment and crossborder restructuring can be recognized. Documents submission to local tax authority is required in the special tax treatment.