China (Shanghai) Pilot Free Trade Zone: Foreign Exchange Controls Relaxed for Qualified Pilot FTZ Entities
Business Regulation and Tax Newsflash
Issue 14 - 5 March 2014
On February 28 the Shanghai Branch of the State Administration of Foreign Exchange ("SAFE") issued implementation regulations relaxing foreign exchange controls in respect of qualified entities in the China (Shanghai) Pilot Free Trade Zone ("Pilot FTZ"). The key points of the regulation are set out below:
Cash pooling and treasury management
- A qualified entity in the Pilot FTZ may apply to open a Domestic Foreign Exchange Funds Master Account ("Domestic Account"), through which to:
- pool and centrally manage foreign exchange funds (i.e. funds from foreign capital, foreign debts, etc.) of the entity's domestic affiliates; and
- centrally receive and make foreign exchange current account payments on behalf of the entity's domestic affiliates, including "netting" relevant receivables and payables.
- To be eligible to apply, the entity must maintain a sound electronic internal foreign exchange management control system, and have good foreign exchange compliance record (i.e. no significant violations within the last three years, and if engaged in trade in goods, ranked "A" in relation to foreign exchange compliance). Applications are to be made to the Shanghai branch of SAFE.
- The entity may also set up an International Foreign Exchange Funds Master Account ("International Account"), the flow of funds between which and overseas is free of foreign exchange restrictions and controls. Funds may be freely transferred between the Domestic Account and International Account of the entity, subject to the quota prescribed by the Shanghai branch of SAFE. Foreign exchange funds paid from overseas into the International Account are subject to foreign debt "registration" requirements; however, such will not use up the foreign debt quota.
Capital account: conversion from foreign currency capital into Rmb / foreign exchange registration
- Unlike outside the Pilot FTZ, a foreign-invested enterprise inside the Pilot FTZ may freely convert foreign currency relating to capital account amounts into Rmb. Such Rmb amounts are, however, to be retained in the designated Rmb account. Transfers out of that Rmb account into other Rmb accounts are still only allowed for "substantiated" business needs.
- For an entity in the Pilot FTZ, foreign exchange registration formalities in respect of direct investments are now delegated to banks from the Shanghai branch of SAFE.
Foreign currency borrowing and lending
- For an entity in the Pilot FTZ,
- the general ceiling in respect of loans offshore, which are denominated in foreign currency, is raised to 50% of the entity's total shareholders' equity (previously 30%); and
- SAFE approval in respect of the provision of guarantees to offshore parties, and the payment of guarantee fees to guarantors offshore is no longer required.
- For a qualified finance leasing company in the Pilot FTZ,
- a "registration" requirement replaces the SAFE "approval" requirement in respect of the company's foreign currency receivables from its "foreign lease" business; and
- lease payments from domestic lessees in foreign currency are now allowed.
Current account: simplification and streamlining of procedures
- Relevant banks may simplify existing document requirements, and review procedures in respect of current account foreign exchange receipt and payments, and the sales and purchase of foreign currency based on the KKD principles (i.e. "Know your customer", "Know your business" and "Due diligence").